e. scientific development. Answer: e
5. In 2020 (before the pandemic) the trade of goods and services across national borders each year is worth a. b. c. d. e.
around $15 trillion. around $20 trillion. around $25 trillion. around $30 trillion. around $35 trillion Answer: c
6.
The international monetary system primarily facilitates a. the international exchange of national currencies. b. the national exchange of international currencies. c. the interest rates of national currencies. d. the international regulation of economic foreign aid. e. the international regulation of foreign direct investment. Answer: a
7.
Multinational corporations account for a. b. c. d. e.
1/4 of the world’s economic production & 1/4 of the world’s trade. 1/4 of the world’s economic production & 1/3 of the world’s trade. 1/2 of the world’s economic production & 1/2 of the world’s trade. 1/2 of the world’s economic production & 3/4 of the world’s trade. 3/4 of the world’s economic production & 1/2 of the world’s trade. Answer: b
8.
Economic development strategies in the post WWII era in developing countries a. b. c. d. e.
have been largely unsuccessful in the newly industrializing countries of East Asia. have been largely successful in the developing countries of East Africa. have been largely successful in the newly industrializing countries of East Asia. have been largely successful in all developing countries. have been largely unsuccessful in all developing countries. Answer: c
9.
Welfare consequences about resource allocation decisions
a. b. c. d. e.
determine the level of societal well-being in a country. influence how income is distributed between nations in the international system. influence how income is distributed between groups within countries. are determined by the national attitudes toward hard work. determine the level of democratic participation in a country. Answer: a
10.
Distributional consequences about resource allocation decisions a. b. c. d. e.
are determined by the level of societal well-being in a country. determine how prestige is distributed in the international system. influence how income is distributed between groups within countries. are determined by the distribution of national attitudes toward hard work. determine the level of democratic participation in a country.
Answer: a
11. Explanatory studies are primarily oriented toward explaining a. b. c. d. e.
who make foreign economic policy choices in governments? how governments make foreign economic policy choices. when governments make foreign economic policy choices. where governments make foreign economic policy choices. why governments make foreign economic policy choices.
Answer: e
12. Evaluative studies are NOT oriented toward a. assessing policy outcomes b making judgments about policy outcomes c. proposing alternatives when the judgment made about a particular policy is a positive one d. proposing alternatives when the judgment made about a particular policy is a negative one. e. assessing policy costs and benefits Answer: c 13.
The idea that the purpose of economic activity was to enrich individuals, not to enhance a state’s power was most strongly held by the a. b. c.
liberalism school of international political economy. conservatism school of international political economy. mercantilist school of international political economy.
d. e.
Marxism school of international political economy. realist school of international political economy.
Answer: a 14. The Marxist school of international political economy primarily does NOT believe that a. the state operates as an agent of the capitalist class. b. investment decisions are made by the few firms that control the investment capital. c. capitalism is associated with a growing rate of profit. d. capitalism is plagued by an imbalance between the ability to produce goods and the ability to purchase goods. e. large corporations are the key factor in determining how resources are used. Answer: c 15. The three different schools generate three very different images of the central dynamic of IPE. Which of the following is true? a. Mercantilists argue that welfare conflicts occur in the IPE when governments compete to attract and maintain desired industries. b. Liberals argue that international economic interactions are essentially conflictual because some countries benefit from international trade more than others. c. Marxists argue that the IPE is characterized by the distributional conflict between classes within countries. d. Marxists argue that the IPE is characterized by the distributional conflict between developed and developing countries within the international arena. e. Liberals argue that international economic conflicts are common because governmental regulation. Answer: c
16. Interests are the goals or policy objectives that the central actors in the political and economic system want to use foreign economic policy to achieve. Which scenario appropriately captures “interests”? a. If you are an American lumber worker, you oppose lumber tariffs because it reduces the likelihood that you will lose your job. b. If you own a substantial share of lumber company stock you will support a lumber tariff because higher lumber prices will produce higher profits. c. If you own a substantial share of lumber company stock you will support a lumber tariff because lower lumber prices will produce lower profits. d. If you are an American lumber worker, you oppose lumber tariffs because it increases the likelihood that you will lose your job.
e. If you are an American lumber worker, you will support lumber tariffs because it reduces the likelihood that you will lose your job. Answer: e
17. Political institutions establish the rules governing the political process. As such, a. democratic institutions promote mass participation in collective choices. b. democratic institutions restrict participation to a narrow set of individuals. c. authoritarian systems promote mass participation in collective choices. d. in international economic organizations, decisions typically reflect the preferences of the less powerful nations. e. they usually do not help to enforce collective decisions. Answer: a
18. In the 19 century, cost and time in long distance trade was made dramatically more profitable by the invention of a. the telegraph. b. the automobile. c. steam engines. d. airplanes. e. ocean going ships. Answer: c th
19. Britain was the first to adopt a free-trade policy a. when it passed its “Corn Laws” in the 1840s. b. when it opened its markets to imported grain. c. when it forced the United States to eliminate most tariffs on trade. d. when it negotiated the Cobden-Chevalier treaty with Germany. e. when it adopted the gold standard. Answer: b
20. Between 1815 and 1914 trade grew more rapidly than in the previous 300 years by increasing by approximately a. 75%. b. 150%. c. 200%. d. 300%. e. 350%. Answer: e
21. Between 1880 and 1910, migration from Western Europe was close to a. 5 million persons.
b. 9 million persons. c. 14 million persons. d. 24 million persons. e. 35 million persons. Answer: c
22. How did national economic policy in most countries change after World War I? a. They continued to expand their colonial expansion. b. They adopted the gold standard to finance the war. c. They no longer tightly controlled international trade flows. d. They retreated into sheltered national economies. e. They no longer tightly controlled international financial flows. Answer: d 23. After WWII, the United States a. returned to its isolationist tradition. b. concluded that its European allies were strong enough to reestablish a stable world economy. c. accepted the responsibilities of hegemonic status that it refused after WW I. d. discouraged the creation of international institutions provide the infrastructure for the postwar global economy. e. rejected macroeconomic policies designed to promote growth and limit unemployment. Answer: c
24. The Post WWII global economy differed from the classical liberal system of the 19 century in important ways. Which of the following statements is NOT true about these differences? a. There were significant changes in public attitudes about the government’s proper economic role. b. In the 19 century liberal system, governments eliminated trade barriers but made little effort to manage domestic economic activity. c. The Great Depression encouraged governments to promote growth and limit unemployment. d. The rules embodied in the Bretton Woods system provided some insulation between the domestic and the international economies. e. The rules embodied in the Bretton Woods system provided no insulation between the domestic and the international economies. Answer: e th
th
25. During the last 80 years, the global economy has played an important role in helping the global population attain a historically unprecedented standard of living. Which of the following statements is NOT true? a. rising inequality and heightened economic insecurity for the working classes within many societies have triggered anti-globalization movements.
b. rising inequality and heightened economic insecurity for the working classes within many societies have triggered pro-democratic populist movements. c. the US and China view each other less as partners and more as rivals. d. the worsening climate crisis poses new challenges for energy-intensive trade flows. e. the worsening climate crisis raises new issues of global economic governance. Answer: b
True-False Questions 1. Global economic forces play a larger role in determining most peoples’ career opportunities than thirty years ago. Answer: True
2. Global economic exchange raises the income of all people at least somewhat. Answer: False
3. The international monetary system exists solely to enable people living in different countries to engage in economic transactions with each other. Answer: True
4. In the international trade system, each WTO country gains access to all other WTO members markets on equal terms. Answer: True 5. Multinational corporations together account for about half of the world’s trade. Answer: False
6. Scholars study how the political battle between the winners and losers of MNC activity shapes government efforts to attract and regulate MNC activities. Answer: True
7. Industrialization and export promotion strategies in almost all Asian countries like India, Philippines and Indonesia have been very successful. Answer: False
8. Decisions about resource allocation influence how income is distributed between groups within countries and between nations in the international system. Answer: True 9. Liberals argue that because all countries benefit from international trade, power has little impact on national welfare, and international economic conflicts are rare. Answer: True
10. Currently, the US and China view each other more as partners and less as rivals, a development that poses challenges to the structure of global production and trade. Answer: False; Essay/Discussion Questions 1. How has the global economy played a central role in bringing about changes shaped by the global rather than national economic forces in your state? 2. How can mangers of multinational corporations in other regions of the world make decisions that affect economic conditions in the United States? 3. What are the similarities and differences between the “modern” mercantilist school of thought and the “classical” liberal school of thought regarding the roles of states and markets in the international arena? 4. What are the strengths and weaknesses of the Marxist school of thought regarding the roles of governments and capitalists in the international arena? 5. Compare and contrast the desirable objectives of foreign economic policy among the three traditional schools of international political economy. 6. Compare and contrast some of the different interests and groups of society regarding the international political economy in developed versus developing countries? 7. In international economic organizations, how does relative bargaining power influence decisions that typically favor the preferences of the most powerful nations? 8. What are the technological improvements in the second half of the 20 century and how have they changed the dynamics of the global economic system? th
9. Today’s global capitalist economy faces significant challenges. What are they and why are they important? 10. How do political institutions establish the rules governing the political process? By establishing rules, how do they enable groups within countries, and groups of countries in the international state system, to reach and enforce collective decisions?
CHAPTER 2: The World Trade Organization and the World Trade System Multiple Choice Questions 1. Annual world merchandise trade has grown during the past 70 years at an average annual rate of about 6 percent to a) $ 7 trillion. b) $ 17 trillion. c) $ 21 trillion. d) $ 24 trillion. e) $ 27 trillion. Answer: b 2. World trade has grown so rapidly over the last 60 years because a) the WTO and GATT supported and encouraged such growth. b) of the competition between the US and China. c) as a consequence of greater wealth equality between rich and poor nations. d) national economies becoming less connected. e) the world’s economic output has grown more than trade. Answer: a 3. The World Trade Organization – WTO a) has a staff and budget about the same as the World Bank. b) has a staff and budget somewhat larger than the World Bank. c) has its headquarters in London. d) has its headquarters in Washington, D.C. e) has its headquarters in Geneva, Switzerland. Answer: e 4. Which two core principles stand at the base of the WTO? a) Political liberalism and nondiscrimination b) Market liberalism and preferential discrimination c) Market liberalism and nondiscrimination d) Political conservatism and dispute settlement e) Intergovernmental bargaining and dispute settlement Answer: c 5. “Non-discrimination” ensures that a) each WTO member faces identical opportunities to trade with other WTO members.
b) each WTO member faces identical opportunities to trade with other non-WTO members. c) each WTO member faces preferential opportunities to trade with other WTO members. d) each WTO member are required to lower tariffs with other WTO members. e) each WTO member are required to raise tariffs with other non-WTO members. Answer: a 6. Tariffs are a) quotas that governments impose on foreign goods entering the country. b) taxes that governments impose on foreign goods leaving the country. c) taxes that governments impose on foreign goods entering the country d) regulations that governments impose on domestic goods leaving the country. e) regulations that governments impose on foreign goods entering the country. Answer: c 7. A public good is defined by which two characteristics? a) Excludability and non-rivalry b) Non-excludability and rivalry c) Undersupply and non-rivalry d) Oversupply and rivalry e) Non-excludability and non-rivalry Answer: e
8. As a hegemon declines in power, a) it becomes more willing to bear the cost of maintaining trade rules and world trade becomes more open. b) it becomes more willing to bear the cost of maintaining trade rules and world trade becomes less open. c) it becomes less willing to bear the cost of maintaining trade rules and world trade becomes less open. d) it becomes less willing to bear the cost of maintaining trade rules and world trade becomes more open. e) it becomes less willing to bear the cost of maintaining trade rules so that more free riders will be able to profit.
Answer: c 9.
The history of hegemonic transitions provides some support that
a) world trade has flourished during periods of hegemonic leadership and floundered during periods without it. b) world trade has floundered during periods of hegemonic leadership and flourished during periods without it. c) the British failed to reconstruct the world economy after WW II even though it had the resources to do so. d) the United States reconstructed the world economy after WW II even though it didn’t have resources to do so. e) The European Union could reconstruct the world economy in the coming decades because China will not have the resources to do so. Answer: a 10. Two important probable changes within the WTO are a) the decline of developing countries as a powerful bloc within the organization, and the emergence of NGOs as a powerful force outside the organization. b) the emergence of developing countries as a powerful bloc within the organization, and the decline of NGOs as a powerful force outside the organization. c) the emergence of advanced countries as a powerful bloc within the organization, and the decline of NGOs as a powerful force outside the organization. d) the emergence of developing countries as a powerful bloc within the organization, and the emergence of NGOs as a powerful force outside the organization. e) the decline of advanced countries as a powerful bloc within the organization, and the emergence of NGOs as a powerful force outside the organization. Answer: d 11. According to Oatley, developed countries a) liberalized industries with capital intensive manufactured goods and continued to protect industries in which they were uncompetitive. b) continued to liberalize all industries in which they were uncompetitive. c) continued to liberalize all industries. d) liberalized industries with labor intensive manufactured goods. e) protected industries with capital intensive manufactured goods. Answer: a
12.
According to Oatley, WTO rules have been criticized by NGOs as a) too favorable towards consumer interests. b) too favorable towards producer interests. c) too biased against producer interests. d) too favorable towards environmental interests. e) too favorable towards labor unions. Answer: b
13.
Reforms that might make WTO decision making more inclusive a) would also make it more difficult to reach agreement within the organization. b) would also make it less difficult to reach agreement within the organization. c) would also make it more useful for governments to pursue their trade objectives. d) would also make it less likely that governments will seek alternative organizations. e) would also make it more hostile to developing country interests. Answer: a
14.
Many observers believe that regional trade arrangements a) don’t pose a threat to the multilateral trade system. b) pose a challenge to the WTO because they don’t offer a more discriminatory way to organize world trade. c) don’t pose a challenge to the WTO because they offer a more preferential market access to another country located in the same region of the world. d) don’t pose a challenge to the WTO because they offer a more discriminatory way to organize world trade. e) pose a challenge to the WTO because they offer a more preferential market access to another country located in the same region of the world. Answer: e
15. Agreements between countries in Western, Eastern, and Central Europe, and in the Mediterranean account for almost a) 30 percent of RTAs in operation. b) 40 percent of RTAs in operation. c) 50 percent of RTAs in operation. d) 60 percent of RTAs in operation. e) 70 percent of RTAs in operation. Answer: c
16. Which of the following is NOT an idea generally advanced by scholars to account for the rapid proliferation of RTAs? a) It has decreased a country’s bargaining power in multilateral trade negotiations. b) The EU establishment of free-trade agreements as the first step in the accession process. c) A country’s desire to gain a more secure access to the market of a particularly important trading partner. d) A government’s need to signal a strong commitment to economic reform. e) The disintegration of the Soviet Union. Answer: a 17.
If more trade is created than diverted, an RTA a) pushes the world toward protectionism. b) has liberalized trade. c) undermines the WTO’s nondiscrimination principle. d) makes it easier for hegemons to stabilize trade. e) has no net impact on trade. Answer: b
18. WTO membership has expanded dramatically since 1985. More than 70 countries have joined, increasing total membership to 164 countries (as of January 2022). a) 145 b) 178 c) 164 d) 190 e) 202 Answer: c
19. The growth of the WTO membership and the emergence of the G-20 as a powerful bloc within the organization a) has lowered the stakes of trade negotiations. b) has made it easier to find packages acceptable to the full membership.
c) has reversed the apparent tendency to place business interests before consumer interests. d) has made it more difficult to find packages acceptable to the full membership. e) has decreased market liberalism. Answer: d 20. The emergence of a vocal NGO movement critical of the WTO’s apparent tendency to place business interests before consumer interests has made a) it more difficult to reach agreements within the organization. b) it less difficult to reach agreements within the organization. c) it easier to reach agreements within other trade organizations. d) possible to expand WTO membership dramatically. e) no difference in reaching agreements within the organization. Answer: a
21. Which of the following statements is NOT true about the Doha Round of trade bargaining that began in November 2001? a) Governments agreed to negotiate additional tariff reductions. b) Governments agreed to incorporate existing negotiations in services. c) Governments agreed to pursue meaningful liberalization of trade in agricultural products. d) Governments agreed to explore aspects of the relationship between trade and the environment. e) Governments agreed to negotiate on government procurement policy. Answer: e 22. International institutions such as the WTO have public good characteristics. Therefore, international rules and procedures a) necessarily benefit all governments equally. b) make it easier to deny a government these benefits once an institution has been established. c) do not decrease as a function of the number of governments that belong to the institution.
d) cannot be frustrated by free riding. e) make it impossible to deny a government these benefits once an institution has been established. Answer: e; Chap 2: Page: 13; Skill: Application 23. In the 1970s and 1980s, many commentators viewed Japan’s ascent as a harbinger of US hegemonic decline a) in spite of increasing US competitive advantage in high technology industries. b) because of increasing US trade surpluses with China. c) because of increasing US trade deficits with Japan. d) because of increasing Japanese protectionism. e) because the end of the Cold War allowed the US to increase its economic alliance with Japan. Answer: c 24.
Free riding describes situations in which a) individuals rely on others to pay for a public good. b) a government relies on publics to pay for a private good. c) governments rely consensus to pay for a public good. d) governments provide welfare for poor people. e) poor people provide private benefits for wealthy individuals Answer: a
25.
An emerging free-trade area in Pacific Asia could be seen as a response to a) a breakdown of regionalism in Europe and the Western Hemisphere. b) increased regionalism in Europe and the Western Hemisphere. c) increasing US trade surpluses with China. d) increasing US trade deficits with Japan. e) increasing trade cooperation between China and Russia. Answer: b
True-False Questions 1. Internationalization has been brought about by the decisions corporations have made about the rules and institutions that govern world trade. Answer: False 2. Market liberalism asserts that every country –no matter how rich or poor- enjoys a higher standard of living with trade than it can achieve without trade. Answer: True 3. National treatment allows governments to use taxes, regulations, and other domestic policies to provide an advantage to domestic firms at the expense of foreign firms. Answer: False 4. Most-Favored Nation (MFN) requires each WTO member to treat all WTO members the same. Answer: True 5. Non-tariff barriers are taxes that governments impose on foreign goods entering the country. Answer: False 6. Governments in most developing countries were skeptical about the ability to foster development through trade. Answer: True 7. Assertions of US hegemonic decline proved accurate when American unilateralism subsided in the mid-1990s. Answer: False 8. Under the leadership of China, Brazil, and India developing countries have constructed a powerful bloc within the WTO in the past decade. Answer: True 9. Governments, under WTO rules, cannot ban imports of a product on health or safety grounds unless a preponderance of scientific evidence indicates that the product is, in fact, harmful. Answer: True
10. Many observers believe that regional trade arrangements (RTAs) pose no challenge to the multilateral trade system. Answer: False
Essay/Discussion Questions 1. Explain how the operation of global markets depends upon rules created by political structures. Why do most political economists believe that if governments had never created this institutional framework after World War II world trade would not have grown so rapidly? 2. Define and explain how the principles of market liberalism and nondiscrimination are the core principles at the heart of WTO operations. What is meant by Most-Favored Nation (MFN) rules and when exceptions are allowed? 3. How are WTO rules created through intergovernmental bargaining? What role do ministerial conferences play in this process? 4. Mexico shifted from a highly protectionist to a more liberal trade policy in the mid1980s. The success of that strategy hinged in part on Mexico’s ability to attract foreign investment from the United States. What prevented Mexico from shifting back to protectionism and nationalizing foreign investments? 4. What is hegemonic stability theory? Why does it depend upon the provision of international public goods? What historical evidence is cited to support hegemonic stability theory? 5. What are historical examples of hegemonic transition in the past two centuries? Is the United States still an economic hegemon? Will China become the next economic hegemon or will it resemble Japan in the 1980s and 1990s? 6. What substantial changes will the WTO face from the growing power of developing countries within the organization? Will more members make consensus of trade issues easier or more difficult? How? Why? 7. What substantial changes will the WTO face from the growing power nongovernmental organizations (NGOs) striving to influence the organization? Why do NGOs worry about how WTO rules affect the ability of governments to safeguard consumer and environmental interests?
8.
Why do many observers believe that regional trade arrangements (RTAs) pose the single greatest challenge to the current multilateral trade system? What factors have influenced the rapid growth of RTAs?
9.
Why did the United States abandon its exclusive strategy through the multilateral trade system in the late 1980s? Why do proponents of agreements like NAFTA believe that the US can achieve more through regionalism than it can achieve within the WTO? What do opponents of regionalism claim?
10.
There is an increasing momentum in the international community to characterize China’s treatment of the Uyghurs as genocide. Chinese officials deny that they infringe on the Uyghur’s human rights, and state that what is occurring in the region is an “internal matter.” How has the United States has responded with diplomatic and economic measures?
CHAPTER 3: The Political Economy of International Trade Cooperation Multiple Choice Questions 1. The concept of production possibility frontiers (PPF) means that a) the factors of production are limited by a country’s geographical frontiers. b) any decision to use factors of production to produce one good necessarily means that these factors are not available to produce other goods. c) any decision to use factors of production to produce one good doesn’t necessarily mean that these factors are not available to produce other goods. d) the factors of production are unlimited by a country’s geographical frontiers. e) countries are endowed with factors of production in infinite amounts. Answer: b 2. Production possibility frontiers (PPF) can be represented graphically by lines that a) are called the marginal rates of transformation. b) are called the rates of marginal production. c) are called the rates of frontier possibilities. d) are called the rates of production transformation. e) are called the marginal transformation of frontiers. Answer: a 3. Because an autarkic country cannot consume more than it produces, the PPF also defines a) the limits of possible exports. b) the limits of possible imports. c) the limits of possible trade. d) the limits of possible investment. e) the limits of possible consumption. Answer: e 4. Consumption indifference curves help us understand a) the specific combination of products consumers will purchase. b) the total amount of products consumers will purchase. c) the general combination of products consumers will not purchase. d) the general combination of products consumers will be indifferent to. e) the specific combination of products countries will not produce. Answer: a 5. The marginal rate of substitution is a consumption indifference curve that
a) typically slopes upwards. b) tells us how much of one good the consumer is willing to give up to acquire an additional unit of the second good. c) reflects the assumption of increasing marginal utility. d) each additional good provides a greater increase of utility. e) reflects the increasing aggregate utility of a country’s consumption. Answer: b 6. Together the PPF and indifference curves allow us to define the equilibrium point a) where the marginal rate of transformation is less than the marginal rate of substitution. b) where the marginal rate of transformation is greater than the marginal rate of substitution. c) maximum consumption occurs in an autarkic economy. d) maximum production occurs in an autarkic economy. e) the point where the marginal rate of transformation is equal to the marginal rate of substitution. Answer: e 7. Equilibrium production and consumption is changed by a country’s decision to a) specialize in the production of one good in order obtain more of another good in which it has a comparative advantage. b) specialize in the production of one good in which it has a comparative advantage in order obtain more of another good in which it has a comparative disadvantage. c) specialize in the production of one good in which it has a comparative disadvantage in order obtain less of another good in which it has a comparative advantage. d) not to trade with another country with which has a comparative advantage. e) not to trade with another country with which has a comparative disadvantage. Answer: b 8. Trade liberalization generally occurs a) because governments often liberalize trade unilaterally. b) because governments strive to open less competitive industries to imports. c) because governments strive to protect less competitive industries from imports. d) through trade bargaining in which governments exchange market access commitments. e) because trade bargaining with other governments is unnecessary. Answer: d
9. A country’s ideal bargaining point is usually its best possible outcome of a) liberalizing comparatively advantaged sectors and protecting comparatively disadvantaged sectors. b) liberalizing both comparatively advantaged and disadvantaged sectors. c) protecting both comparatively advantaged and disadvantaged sectors. d) protecting comparatively advantaged sectors and liberalizing comparatively disadvantaged sectors. e) minimizing all imports and maximizing all exports. Answer: a 10. The ideal trade bargaining outcome for the Group of 20 countries a) combines high barriers to their agricultural exports and high barriers to their manufactured goods imports. b) combines low barriers to their agricultural exports and low barriers to their manufactured goods imports. c) combines low barriers to their agricultural exports and high barriers to their manufactured goods imports. d) combines high barriers to their agricultural exports and low barriers to their manufactured goods imports. e) combines high barriers to their agricultural imports and low barriers to their manufactured goods exports. Answer: c 11. The ideal trade bargaining outcome for the US/EU countries a) combines high barriers to their agricultural imports and low barriers to their manufactured goods exports. b) combines high barriers to their agricultural imports and high barriers to their manufactured goods exports. c) combines low barriers to their agricultural imports and high barriers to their manufactured goods exports. d) combines low barriers to their agricultural imports and low barriers to their manufactured goods exports. e) combines high barriers to their services and high barriers to their manufactured goods imports. Answer: a -
12. Negotiating the best deal possible requires a) governments to trust each other to reveal only information they wish to reveal.
b) impatient governments to accept bad deals. c) patient governments to accept bad deals. d) governments to force each other to reveal information they do not wish to reveal. e) governments to reveal everything at the beginning of negotiations. Answer: d 13. If governments are equally patient a) then no deal will ever be reached. b) one government may gain bargaining power if it has an attractive outside option. c) one government may lose bargaining power if it has an attractive outside option. d) one government may gain bargaining power if it doesn’t have an attractive outside option. e) they will both lose bargaining power. Answer: b 14. Governments are more likely to capture a larger share of the available gains from an agreement if a) they are the least willing to wait. b) they are unwilling to risk a breakdown of negotiations. c) they don’t have outside options. d) they threaten brute force. e) they are the most willing to wait. Answer: e15. The enforcement problem of trade agreements refers to the fact that a) governments can be certain that other governments will comply with the trade agreements that they conclude. b) governments cannot be certain that other governments will comply with the trade agreements that they conclude. c) governments can be certain that other governments will not comply with the trade agreements that they conclude. d) governments cannot be certain that other governments will not comply with the trade agreements that they conclude. e) governments are reluctant to enter into trade agreements that are mutually beneficial. Answer: b 16. The Hecksher-Ohlin trade model argues that a) developed countries have the same basic factor endowments. b) developed countries have the same comparative advantages.
c) developed countries have a lot of capital but little labor. d) comparative advantage arises from differences in factor endowments. e) comparative advantage arises from similarities in factor endowments. Answer: d 17. A set of mutually beneficial agreements that exhaust joint gains is called a) a comparative advantage curve. b) a Hecksher-Ohlin curve. c) a contract curve. d) a marginal rate of substitution curve. e) a consumption indifference curve. Answer: c 18. The sequence of preferred outcomes for the Group of 20 would be: a) protect/liberalize >liberalize/liberalize >protect/protect >liberalize/protect b) liberalize/liberalize >protect/protect >liberalize/protect >protect liberalize c) protect/protect >liberalize/protect >protect/liberalize >liberalize/liberalize d) liberalize/protect >liberalize/liberalize >protect/protect >liberalize/protect e) protect/liberalize >protect/protect > liberalize/liberalize >liberalize/protect Answer: a
19. The sequence of preferred outcomes for the EU would be: a) protect/liberalize >liberalize/liberalize >protect/protect >liberalize/protect b) liberalize/protect >protect/protect >liberalize/liberalize > protect/liberalize c) protect/protect >liberalize/protect >protect/liberalize >liberalize/liberalize d) liberalize/liberalize >protect/protect >liberalize/protect >protect liberalize e) liberalize/protect >protect/protect> protect/liberalize >liberalize/liberalize Answer: b 20. Pareto optimality is when a) no single actor can be made better off without at the same time making another actor worse off. b) at least one actor can be made better off without at the same time making another actor worse off. c) neither player has an incentive to change strategies unilaterally. d) both players have the advantage to change strategies unilaterally. e) one player has the advantage to change strategies unilaterally but the other player doesn’t. Answer: a
21. Nash equilibrium is when a) no single actor can be made better off without at the same time making another actor worse off. b) at least one actor can be made better off without at the same time making another actor worse off. c) neither player has an incentive to change strategies unilaterally. d) both players have the advantage to change strategies unilaterally. e) one player has the advantage to change strategies unilaterally but the other player doesn’t. Answer: c 22. The prisoners’ dilemma exercise suggests that a) even when all countries would benefit from trade liberalization, political dynamics trap governments in a protectionist world. b) even when all countries would benefit from protectionism, political dynamics trap governments in a liberalization world. c) even when no countries would benefit from trade liberalization, political dynamics trap governments in a protectionist world. d) even when no countries would benefit from protectionism, political dynamics trap governments in a liberalization world. e) trade liberalization and protectionism benefit all countries equally. Answer: a 23. In “tit-for-tat”, each government plays the strategy a) that its partner played in the first round of the game. b) that its partner played in the previous round of the game. c) that requires governments to know when their partners are not complying with trade agreements and when they are not cheating. d) that requires governments to know when their partners are liberalizing. e). that requires governments to know when their partners are subsidizing. Answer: b 24. The WTO does NOT provide the following conditions. a) It helps iterate the game by creating expectations of repeated interaction. b) WTO members know that the governments with which they negotiate today will be the governments with which they negotiate tomorrow. c) WTO members interact regularly within the organization. d) WTO’s rules define the conditions that must be met in order for governments to decrease transparency.
e) WTO provides the information that governments need to implement effective reciprocity strategies Answer: d 25. The international trade system lacks the equivalent of a state to enforce agreements, and thus a) governments face a pervasive enforcement problem when they try to cooperate for mutual gain. b) governments face a limited enforcement problem when they try to cooperate for mutual gain. c) governments often neglect consumer interests in favor of producer interests. d) governments often neglect producer interests in favor of consumer interests e) governments attempt to gain maximum access in exchange for political concessions. Answer: a -
True-False Questions 1. Comparative advantage derives from differences in labor productivity that result from differences in technology. Answer: True 2. Trade liberalization generally occurs through trade bargaining in which governments exchange market access commitments. Answer: True 3. Indifference curves typically slope downwards. Answer: True 4. Production and consumption will occur where the production possibility frontier and the indifference curve are parallel. Answer: False 5. Bargaining power determines which distribution of gains governments ultimately select. Answer: True 6. The enforcement problem refers to the fact that governments cannot be certain that other governments will comply with the trade agreements that they conclude Answer: True 7. A Nash equilibrium is an outcome at which both players have an incentive to change strategies unilaterally.
Answer: False 8. Pareto optimality determines which distribution of gains governments ultimately select. Answer: False 9. The prisoners’ dilemma model suggests that even when all countries would clearly benefit from trade protectionism, political dynamics trap governments in a liberalized world. Answer: False 10. In tit for tat reciprocity strategies, each government plays the strategy that its partner played in the previous round of bargaining. Answer: True
Essay/Discussion Questions 1. Why do governments have strong incentives not to liberalize trade even when it can be demonstrated that they are worse off than they could be when they won’t? 2. Explain the differences between production possibility frontiers and indifference curves. How do each affect trade patterns? 3. How can trade between the United States and China affect the equilibrium of production and consumption in both countries caused by each country specializing in different goods? 4. Explain the Hecksher-Ohlin model of trade and the role of factor endowments. Give specific sector examples. 5. Model trade bargaining using basic spatial theory using Doha Round problems as your example. 6. Explain the WTO’s Dispute Settlement Mechanism and its Appellate Body. What problems have arisen with US trade policies in recent history? 7. Explain the role of enforcement problems in trade agreements. How does the WTO contribute to the alleviation of these problems? 8. Explain the difference between Pareto optimal and suboptimal outcomes in trade bargaining using the prisons’ dilemma game.
9. What is a Nash equilibrium outcome? Give specific examples using Doha Round trade negotiations. 10. Explain the principle of comparative advantage in international trade.
Bargaining Contract Curve Dispute Settlement Mechanism Enforcement Problem Factor Endowments Hecksher-Ohlin Model Nash Equilibrium Outside Option Pareto Suboptimal Patience Reciprocity
CHAPTER 4: A Society-Centered Approach to Trade Politics Multiple Choice Questions 1. A society-centered approach to trade politics argues that a) a government’s trade policy objectives are not shaped by politicians’ responses to interest group demands. b) a government’s trade policy objectives are shaped by politicians’ responses to interest group demands. c) a government’s trade policy objectives are shaped by rational choices among strong economic models. d) trade largely has no distributional consequences. e) distributional consequences from trade only creates winners. Answer: b 2. The model that argues that trade politics are driven by competition between competition between labor and capital is called a) the sector model. b) the liberal model. c) the conservative model. d) the factor model. e) the distributional model. Answer: d 3. The model that argues that trade politics are driven by competition between two industries is called a) the sector model. b) the distributional model. c) the factor model. d) the pluralist model. e) the competition model. Answer: a
4. A policy of free trade will cause a) economic specialization that gradually increases the size and political significance of the protectionist industries and interests. b) economic specialization that gradually reduces the size and political significance of the protectionist industries and interests. c) economic specialization that gradually increases the size and but not the political significance of the protectionist industries and interests. d) no consequences for the relative balance of political power between the protectionist and liberalizing blocs. e) no consequences for the relative political power of liberalizing blocs. Answer: b
5.The tendency for trade to cause factor prices to converge is known as the a) factor mobility theorem. b) import competing theorem. c) Stolper-Samuelson theorem. d) Hecksher-Ohlin theorem. e) factor price differentiation theorem. Answer: c 6. The factor model predicts that a) labor will prefer protectionist trade policies in developing countries. b) owners of capital will prefer liberal trade policies in developing countries. c) labor will prefer will prefer liberal trade policies in developed countries. d) owners of capital will prefer liberal trade policies in developed countries. e) owners of capital will prefer protectionist trade policies in developed countries. Answer: d 7. A large body of evidence indicates that support for trade liberalization a) is lowest among that segment of the American work force with the least amount of formal education. b) is highest among that segment of the American work force with the least amount of formal education. c) is lowest among that segment of the American work force with the least amount of labor mobility. d) is lowest among that segment of the American work force with the most amount of labor mobility. e) is equal among the segments of the American work force regardless of the amount of formal education. Answer: a 8. The sector model predicts that a) trade politics are driven by competition between high skill workers. b) trade politics are driven by competition between industries. c) trade politics are driven by competition between low skill workers. d) trade politics are driven by competition between capital and labor. e) trade politics are driven by competition between union and non-union workers. Answer: b 9. The sector model assumes that a) factors are not easily moved from one industry to another. b) factors are easily moved from one industry to another. c) factors are not specific to the sector in which they are currently employed.
d) geography of industry location does not mean workers have to physically relocate. e) logistical obstacles to physical relocation are not insurmountable. Answer: a 10. The factor model assumes that a) factors are not highly mobile from one industry to another. b) people’s economic interests are not determined by their factor ownership. c) people’s economic interests are determined by their factor ownership. d) logistical obstacles to physical relocation are insurmountable. e) factors are specific to the sector in which they are currently employed. Answer: c 11. The factor and sector models both argue that a) globalization is good. b) globalization is not good. c) trade policy preferences are not determined by the income consequences of trade. d) trade policy preferences are determined by the income consequences of trade. e) trade politics is driven by the conflicts between business and labor. Answer: d 12. Oatley’s view suggests that people base their trade policy preferences on a) what is good for the country as a whole. b) what is good for their religious beliefs. c) what is bad for the country as a whole. d) primary actors that engage in trade politics which typically are large organizations. e) primary actors that engage in trade politics which typically are individuals. Answer: d 13. The logic of collective action helps us understand several important characteristics of trade politics in advanced industrial countries including that a) consumers, rather than producers, dominate trade politics. b) export-oriented sectors demanding liberalization dominate trade politics. c) import-competing sectors demanding liberalization dominate trade politics. d) reciprocal trade agreements make it harder for export-oriented industries. e) governments rarely liberalize unilaterally. Answer: e
14. Which of the following is NOT an important characteristic of trade politics illustrated by the logic of collective action? a) Producers, rather than consumers, dominate trade politics. b) Import-competing sectors demanding protectionism dominate trade politics. c) Individual consumers have a strong incentive to organize and campaign to influence trade policy. d) Individual consumers face a strong incentive to be a free rider. e) Individual consumers have few incentives to organize and campaign to influence trade policy. Answer: c 15. Most scholars argue that the Reciprocal Trade Agreements Act (RTAA) of 1934 a) delegated the President the authority to increase tariffs in exchange for equivalent concessions from foreign governments. b) authorized the Congress to reduce tariffs in exchange for equivalent concessions from foreign governments. c) transformed the large heterogeneous group favoring liberalization into smaller groups of export-oriented industries that could more easily organize. d) transformed the smaller homogeneous group favoring protectionism into larger groups of export-oriented industries that could more easily organize. e) transformed the smaller homogeneous group favoring liberalization into larger groups of export-oriented industries that could more easily organize. Answer: c 16. Supply side models of trade politics find considerable agreement a) that political institutions do not play an important role in transforming interest group demands into actual policies. b) about how political institutions play an important role in transforming interest group demands into actual policies. c) that political institutions do not play an important role in transforming interest group demands into actual policies by establishing rules that influence strategies. d) that political institutions do not play an important role in transforming interest group demands into actual policies by enforcing rules that influence strategies. e) that political institutions play an important role in transforming interest group demands into actual policies by establishing rules that influence strategies. Answer: e 17. Electoral systems that combine single member districts and first-past-the-post elections are best called a) proportional representation systems.
b) majoritarian systems. c) modified proportional representation systems. d) systems that advantage smaller third parties. e) systems that advantage party coalitions. Answer: b 18. Electoral systems that distribute legislative representation in accordance with the share of the popular vote are best called a) majoritarian systems. b) run-off systems. c) proportional representation systems. d) single party systems. e) multi-party systems. Answer: c 19. Electoral systems affect trade policies in which ways? a) Majoritarian systems may encourage organization around common factor-based interests. b) Proportional representation (PR) systems may encourage organization around common sector-based interests. c) Majoritarian systems may encourage organization around broad industry interests. d) Proportional representation (PR) systems may encourage organization around common factor-based interests. e) Proportional representation (PR) systems may encourage organization around interests in their own districts. Answer: d 20. We would expect governments with PR systems to maintain a) lower tariffs because large groups benefit more from protectionism. b) lower tariffs because small groups benefit more from protectionism. c) lower tariffs than majoritarian electoral systems. d) higher tariffs than majoritarian electoral systems. e) higher tariffs because large groups benefit more from protectionism. Answer: c: : 21. A political actor whose agreement is necessary in order to enact policy is a) called a veto player. b) called a maverick player. c) called a poker player.
d) not usually present in unified government. e) not usually present in divided government. Answer: a
22. Applied to trade policy, a) political systems with few veto players will find it more difficult to alter tariffs in response to societal pressure for change. b) political systems with many veto players will find it easier to alter tariffs in response to societal pressure for change. c) liberalization rises more sharply in recessions in countries with more veto players. d) protectionism rises more sharply in recessions in countries with fewer veto players. e) political systems with many veto players will find it more difficult to alter tariffs in response to societal pressure for change. Answer: e 23. The society-centered approach helps us understand trade politics because it has several strengths. a) It more adequately explains who will win the political battle. b) It gives us more guidance about how to measure the balance of power between interests. c) It more correctly assumes that politicians play no autonomous role in trade politics. d) It more adequately addresses the motivations of noneconomic actors in trade politics. e) It gives us more guidance about how trade shapes the fortunes of different groups in society. Answer: e 24. Which of the following is a weakness of the society-centered approach to understanding trade politics? a) It correctly assumes that politicians play no autonomous role in trade politics. b) It adequately addresses the motivations of noneconomic actors in trade politics. c) It adequately addresses how to measure the balance of power between interests. d) It gives us more guidance about how trade shapes the fortunes of different groups in society. e) It gives us more guidance about who will win the political battle. Answer: b
25. In Britain’s Brexit decision, a) the more or less constant pro-Brussels refrain in British politics has been amplified since 2006 by a number of factors associated with globalization. b) polling data offers evidence that British voters’ preferences over Brexit didn’t
reflect their economic interests as the standard trade models would predict c) polling data offers evidence that those who gained from Britain’s economic interdependence with the EU would vote Remain. d) individuals with greater mobility and fewer sector-specific skills (the young) are less ready to accept the risks of trade openness than individuals with more mobility. e) people who believed that Britain was better off 30 years ago than it was today were more likely to vote Remain. Answer: c
True-False Questions 1. A society-centered approach argues that a government’s trade policy objectives are shaped by politicians’ responses to interest group demands. Answer: True 2. Both the factor and the sector model of trade policy preferences agree that raising and lowering tariffs redistributes income. Answer: True 3. The factor model predicts that labor will prefer protectionist trade policies in developing countries. Answer: False 4. The sector model predicts that trade politics are driven by competition between capital and labor. Answer: False 5. In Britain’s Brexit decision, voters with a university degree were significantly more likely to support Remain, while voters without a university degree were more likely to vote Leave. Answer: True: : -
6. The tendency for trade to cause factor prices to diverge is known as the StolperSamuelson theorem. Answer: False 7. By the logic of collective action, consumers, rather than producers, dominate trade politics. Answer: False 8. The increasing importance of factor or class in trade politics arises from the fact that capital is more mobile internationally than labor Answer: True 9. Electoral systems that combine single member districts and first-past-the-post elections are best called proportional representation systems. Answer: False 10. The society-centered approach does not address the motivations of noneconomic actors in trade politics. Answer: True
Essay/Discussion Questions 1. Explain the differences between the factor and sector models of trade policy preferences regarding income distributions. 2. Explain the differences between the factor and sector models of trade policy preferences regarding factor mobility. 3. Explain how and why transforming preferences into political demands requires that the actors who share a common preference organize in order to exert influence on the policy-making process. 4. Explain how producer groups rather than consumer groups can more easily organize to lobby government in the pursuit of their desired trade policy. 5. Is Brexit a backlash against globalization? Compare the differing answers. 6. How do the differences between majoritarian and proportional representation electoral systems affect trade politics? 7. Explain how veto players influence trade policy decisions. 8. What are the weaknesses of the society-centered approach to trade politics?
9. Explain how trade politics is driven by conflicts between import-competing and exportoriented industries.
Chapter 5: A State-Centered Approach to Trade Politics Multiple Choice Questions 1. The state-centered approach to trade politics argues that national policymakers intervene in the economy in pursuit of a) national objectives that are dependent on domestic groups’ self-interested concerns. b) national objectives that are independent of domestic groups’ self-interested concerns. c) international objectives that are dependent on foreign groups’ self-interested concerns. d) international objectives that are independent of foreign groups’ self-interested concerns. e) national objectives that are dependent on foreign groups’ self-interested concerns. Answer: b 2. In order to claim that a tariff and other forms of government intervention raise social welfare one must be able to demonstrate that a) something prevents factors from shifting into industries that yield lower costs than are available in other sectors in the economy. b) something prevents factors from shifting into industries that yield higher costs than are available in other sectors in the economy. c) something prevents factors from shifting into industries that yield lower returns than are available in other sectors in the economy. d) something prevents factors from shifting into industries that yield higher returns than are available in other sectors in the economy. e) short term losses will be greater than long term gains. Answer: d 3. Economies of scale arise when the average cost of production falls a) as the number of units falls. b) as the number of units rises. c) as specific experience skills decline. d) as specific experience skills increase. e) as profits increase. Answer: b 4. In cases of infant industries, even with domestic economies of scale, a) a new firm will be able to effectively compete once it begins to export. b) a new firm will find it easier to compete with tariffs to protect it from more efficient foreign competitors. c) a new firm will find it harder to compete with tariffs to protect it from less efficient foreign competitors.
d) government procurement may be the only way to make them internationally competitive. e) export subsidies may be necessary to achieve economies of experience Answer: b 5. Economies of experience arise when the cost of production falls a) as the number of units falls. b) as the number of units rises. c) as specific experience skills decline. d) as specific experience skills increase. e) as profits increase. Answer: d 6. Subsidies are more efficient than tariffs because they better a) target tariff barriers by foreign producers. b) target higher long term foreign producers’ costs. c) lower higher short term domestic producers’ costs. d) raise higher short term domestic producers’ costs. e) lower consumer welfare benefits. Answer: c 7. An infant industry firm may be reluctant to borrow from private markets instead of relying on a public subsidy when they fear that a) experienced workers will go to work for other firms. b) private capital markets are too efficient. c) private capital markets are too week. d) they will not achieve sufficient economies of scale. e) governments will not extend them loans. Answer: a 8. The logic of infant industry protection was first developed to a) improve the growth of German industries in competition with American ones. b) improve the growth of American industries in competition with British ones. c) improve the growth of Japanese industries in competition with American ones. d) improve the growth of American industries in competition with Japanese ones. e) improve the growth of American industries in competition with German ones. Answer: b 9. In the context of industrial policies, strong states are characterized by a a) high degree of de-centralization of authority. b) low degree of coordination among state agencies. c) large number of channels through which societal actors can attempt to influence policy. d) small number of channels through which societal actors can attempt to influence policy. e) powerful business and labor interest groups.
Answer: d 10. In the context of industrial policies, weak states are characterized by a) high degree of centralization of authority. b) high degree of coordination among state agencies. c) large number of channels through which societal actors can attempt to influence policy. d) small number of channels through which societal actors can attempt to influence policy. e) weak business and labor interest groups. Answer: c 11. ___________ is often depicted as the preeminent example of a strong state that has been able and willing to use industrial policy to promote economic development. a) Great Britain b) Germany c) United States d) Japan e) Post-Soviet Russia Answer: d 12. ___________ is often depicted as an example of a weak state that has been unable and unsuccessful in using industrial policy to promote economic development. a) Great Britain b) France c) United States d) Japan e) China Answer: c 13. The Biden administration has made green industrial policy (GIP) central to its climate change strategy. GIP uses a) state investment, incentives, and regulations to promote the development and deployment of environmentally sustainable technologies. b) state investment, incentives, and regulations to promote the development and deployment of environmentally un sustainable technologies. c) federal investment, incentives, and regulations to promote the development and deployment of environmentally sustainable technologies. d) infant industry incentives, and regulations to promote the development and deployment of environmentally sustainable technologies. e) military investment, incentives, and regulations to promote the development and deployment of environmentally sustainable technologies Answer: a 14. Opponents of green industrial policies claim that government intervention a) misdirects investment to more productive industries.
b) misdirects investment to less productive industries. c) protects against corruption. d) that foreign industry will have an unfair advantage over their American competitors. e) that American industry will have an unfair disadvantage because Europeans care more about climate change. Answer: b 15. Which of the following reasons is NOT one of the ones used to justify subsidies to high technology industries in advanced industrialized countries? a) They earn a higher-than-normal return on investment. b) They pay higher wages to workers than standard manufacturing industries. c) They boost the international competitiveness of such industries. d) The welfare gains generated by this industry are substantially larger than the welfare losses incurred during the period of subsidy. e) Choosing these economic winners leads to less corruption. Answer: e 16. Oligopolistic global markets are characterized by a) profits greater than earned in equally risky investments. b) higher incomes for workers. c) lower costs than those incurred in equally risky investments. d) a smaller number of competing firms. e) a larger number of competing firms. Answer: d 17. Strategic trade theory assumes that a) defense-related procurement practices are designed to meet national security objectives. b) in the absence of intervention by any government, high tech industries offer a first-mover advantage. c) In the absence of intervention by any government, high tech industries offer a last-mover advantage. d) societies will be especially interested in oligopolistic high-tech industries because of zero-sum excess returns. e) the combination of economies of scale and experience create higher wages. Answer: d 18. Countries losing high technology industries as a consequence of industrial policies pursued by other countries a) has not been much of a source of conflict in the international trade system. b) usually don’t respond by supporting their own firms to offset the advantages enjoyed by foreign firms. c) rarely attempt to prevent foreign governments from using industrial policy subsidies. d) has been a source of much conflict in the international trade system.
e) is almost entirely the result of different factor advantages as predicted by standard trade theory. Answer: d 19. In the absence of intervention by any government, the firm that is the first to enter a particular industry will win a first-mover advantage. This first-mover advantage a) arises from economies of scale and experience. b) arises from economies of scale but not experience. c) arises from economies of experience but not scale. d) arises from economies of scale and innovation. e) doesn’t increase national employment and welfare. Answer: a 20. The semiconductor industry prospered in the US until the early 1980s because a) of earlier government support of funding for research & development (R&D) and defense related purchases. b) tariffs and quotas kept Japanese chips out of the American market. c) the US government restricted the ability of Japanese semiconductor firms to purchase existing American firms. d) tariffs and quotas kept European chips out of the American market. e) of different factor advantages as predicted by standard trade theory. Answer: a 21. Micro-foundations are explanations that set out the incentive structure that a) encourages state officials to adopt policies that promote global welfare. b) encourages state officials to adopt policies that promote their re-election. c) encourages state officials to adopt policies that promote national welfare. d) encourages state officials to adopt policies that promote micro-businesses. e) encourages state officials to adopt policies that compensate for factor immobility. Answer: c 22. Efficiency gains realized as a result of greater experience dynamics are often called a) “moving up the learning curve”. b) “moving down the learning curve”. c) “moving up the indifference curve”. d) “moving down the indifference curve”. e) “moving up the profitability curve”. Answer: b 23. In general, state-centered approaches are useful because they a) better explain national security micro foundational reward incentives. b) better establish the parameters in which policy must be made. c) better explain how government intervention can improve national welfare. d) better explain state autonomy in democratic political systems. e) better provide a useful check on the tendency to focus exclusively on the interests of interest groups.
Answer: e 24. European global commercial aircraft firms were able to catch up to American firms by the late 1990s because a) they used similar industrial policy tactics used by American governments in a previous era. b) of different sector advantages obtained by European domestic interest groups. c) tariffs and quotas kept American firms out of the European market. d) of late-mover advantages to utilize the most recent technological innovations. e) the US was unsuccessful in of obtaining WTO sanctions against their illegal actions. Answer: a 25. The seventeen-year US – EU conflict came to a sudden close in June of 2021. The truce in the ongoing conflict for market share was influenced by a) strategic rivalry, though in this case by concerns about Russia. b) strategic rivalry, though in this case by concerns about Japan. c) strategic rivalry, though in this case by concerns about China. d) economic recession in both markets. e) technological innovation in the US. Answer: c
True-False Questions 1. A state-centered approach argues that national policymakers intervene in the economy in pursuit of objectives that are determined independently from domestic interest groups’ narrow self-interested concerns. Answer: True 2. The infant industry case for protection argues that there are cases in which newly created firms will not be efficient initially but could be efficient in the long run if they are given time to mature. Answer: True 3. Economies of scale arise when the unit cost of producing falls as the number of units produced falls. Answer: False 4. Economies of experience arise when efficient production requires specific skills that can only be acquired through extensive research and development in the industry. Answer: False 5. Efficiency gains realized as a result of greater skill in production are often called “moving up the learning curve”. Answer: False
6. Industrial policy can be defined as the use of a broad assortment of instruments in order to channel resources away from some industries and direct them toward those industries that the state wishes to promote. Answer: True 7. State strength is the degree to which national policymakers are insulated from domestic interest group pressures. Answer: True 8. Weak states may be less able to implement industrial policies that redistribute societal resources because policymakers need worry less that such policies will have a negative impact on their position of power. Answer: False 9. Strategic trade theory asserts that many high-tech industries are characterized by oligopolistic competition that often has a first-mover advantage. Answer: True 10. Countries losing high-technology industries as a consequence of the industrial policies pursued by other countries often respond by supporting their own firms in a similar way. Answer: True
Essay/Discussion Questions 1. Explain the differences and similarities between society-centered and state-centered approaches to trade politics. 2. Explain the costs and benefits of state-centered rationale for government intervention compared to standard trade theory. 3. Explain the reasons why an industry may or may not be efficient. 4. Explain the differences between economies of scale and economies of experience using the example of commercial aircraft. 5. Explain how state strength determines the political foundation of industrial policies by comparing Japan, France and the United States after WWII.
6. Explain why and how industrial policies in high-technology industries have created so much conflict in international trade. 7. How does strategic trade theory provide the justification for industrial policy in high technology industries? 8. Explain how government R&D subsidies and procurement policies affected strategic trade rivalries in the semiconductor and commercial aircraft industries between the US, Japan & the EU in the past thirty years. 9. Explain how and why the Biden administration has made green industrial policy central to its climate change strategy. 10. What incentive does the state have to act in ways that enhance national welfare? Use contemporary examples.
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Chapter 6: Trade and Development I: Import Substitution Industrialization Multiple Choice Questions 1. Trade and development policies in developing countries after WW I have been strongly shaped by political competition between a) export and import oriented agricultural interests. b) export and import oriented manufacturing interests. c) rural-based agriculture and urban-based manufacturing. d) former colonial and nationalist agriculture. e) former colonial agriculture and nationalist manufacturing. Answer: c of all 2. With a few exceptions (particularly in Latin America), between economic activity in developing countries in 1960 was based in agriculture. a) 20% and 30% b) 25% and 35 % c) 33% and 50% d) 40% and 60 % e) 60% and 70% Answer: c Page 3. Agriculture in East Asia & the Pacific (as a percent of GDP) has a) increased from 2% in 1960 to 18% in 1995. b) increased from 8% in 1960 to 56% in 1995. c) decreased from 56% in 1980 to 17% in 1995. d) increased from 20% in 1980 to 66% in 1995. e) decreased from 46% in 1960 to 18% in 1995. Answer: e Table 4. In 1960 agriculture (as a percent of GDP) in advanced industrial economies was a) 25%. b) 20%. c) 15%. d) 10%. e) 5%. Answer: e 5. In Asia and in Africa, export-oriented agricultural interests dominated local politics through
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a) colonial structures. b)e nclave structures c) conclave structures d)i ndigenous structures
e)c onvex structures Answer: a 6. According to structuralists in the post WWII era, markets in developing countries would not naturally reallocate sufficient resources from agriculture to manufacturing because a) they were still dominated by export-oriented agricultural interests. b) they were still dominated by export-oriented manufacturing interests in advanced industrial states. c) they were too poor because of having been prone to monoexportism. d) they were too inflexible. e) they did not have a coherent economic development strategy. Answer: d 7. The problem of complementary demand means that in subsistence agricultural economy, trying to establish a manufacturing economy meant a) no manufacturing firm would be willing to invest unless a large number of manufacturing industries were started simultaneously. b) no manufacturing firm would be willing to invest unless it was given infant industry protection. c) no manufacturing firm would be willing to invest unless the government agreed to purchase a minimum amount of its product. d) no manufacturing firm would be willing to invest unless wages were increased enough in agriculture to allow farmers to buy their product. e) unless there was sufficient interdependencies among the manufacturing firms. Answer: a 8. The structuralist critique of the market provided a compelling justification for state-led strategies of industrialization primarily because of a) the problem of the “big push”. b) start-up manufacturing coordination problems. c) the problem of pecuniary internal economies. d) the problem of complementary supply. e) threats of domestic violence by the urban unemployed. Answer: b
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9. According to the Singer-Prebisch theory developing countries trying to industrialize would find it much easier by participating in a GATT-based trade system a) because they would have better access to critical resources. b) because they would have better terms of trade. c) because they would have less access to critical resources. d) because they could take advantage of infant industry protections. e) because their consumers would have lower prices through comparative advantage benefits. Answer: c 10. Improvement in a country’s terms of trade means that a) the price of its imports is rising relative to the price of its exports. b) the price of its exports is falling relative to the price of its imports. c) the price of its exports is rising relative to the costs of its exports. d) the price of its imports is rising relative to the costs of its imports. e) the price of its exports is rising relative to the price of its imports. Answer: e 11. The Singer-Prebisch theory argues that developing countries’ terms of trade deteriorate steadily over time because of a) greater demand for primary commodities versus industrial goods. b) higher costs of primary commodities versus industrial goods. c) less demand for industrial goods versus primary commodities d) greater government protection for primary commodities versus industrial goods. e) less demand for primary commodities versus industrial goods. Answer: e 12. The income elasticity of demand is the degree to which a) a change in demand alters the cost for a particular product. b) rising import prices relative to export prices yields deteriorating terms of trade. c) a change in income alters the demand for a particular product. d) rising export prices relative to import prices yields deteriorating terms of trade. e) rising export prices relative to import prices yields improving terms of trade. Answer: c 13. The claim that developing countries face a continuous decline in their terms of trade a) has been confirmed by most recent research according to Oatley. b) has been disputed by most recent research according to Oatley. c) was not really believed by governments in developing countries according to Oatley.
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d) cannot be tested because the hypothesis is too generalized according to Oatley. e) did not influence trade and development policies of developing countries according to Oatley. Answer: b 14. Confidence that the state could achieve what markets would not was based in part on evidence of the dramatic industrialization achieved by a) China between 1980 and 2000. b) Soviet Union between 1950 and 1970. c) Soviet Union between 1930 and 1950. d) Germany between 1920 and 1940. e) United States between 1930 and 1950. Answer: c 15. Import substitution industrialization (ISI) was based on the strategy of a) substituting previously imported simple consumer goods with newly domestically produced ones. b) substituting previously exported simple consumer goods with newly domestically produced ones. c) substituting previously imported advanced consumer goods with newly domestically produced simple ones. d) substituting previously exported advanced consumer goods with newly domestically produced advanced agricultural ones. e) substituting previously imported agricultural goods with newly domestically produced manufacturing ones. Answer: a 16. Export substitution strategy is one a) in which manufactured goods industries developed in secondary ISI began to export rather than continue to produce for the domestic market. b) which was adopted by most governments outside of East Asia. c) in which manufactured goods industries developed in easy ISI began to export rather than continue to produce for the domestic market. d) in which manufactured goods industries developed in easy ISI began to be imported rather than exported for the international market. e) in which manufactured goods industries developed in easy ISI began to be imported rather than continue to produce for the domestic market. Answer: c 17. In secondary ISI, emphasis shifts from
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a) the manufacture of simple consumer goods to consumer durable goods and intermediate inputs. b) the manufacture of consumer durable goods to intermediate exports. c) was adopted by most governments of East Asia. d) the manufacture of consumer durable goods and intermediate inputs to capital goods needed to produce simple consumer goods. e) the manufacture of simple consumer goods for exports and the import of cheaper consumer durable goods. Answer: a 18. According to Oatley, the costs of ISI were borne by a) export-oriented commodities. b) agriculture. c) private owned producers. d) foreign manufacturing exporters. e) urban consumers Answer: b 19. Backward linkages arise when a) the production of one good decreases demand in industries that supply components for that good. b) the production of one good increases the profits in industries that supply components for that good. c) the production of goods for export increases demand in industries that supply components for that good. d) the production of goods that were previously imported increases demand in consumers for that good. e) the production of one good increases demand in industries that supply components for that good. Answer: e 20. To ensure that such foreign investments were not simple assembly operations the Brazilian government instituted local rules that required the foreign automakers operating in the country a) to purchase 90 percent of their parts from Brazilian firms. b) to purchase 80 percent of their parts from Brazilian firms. c) to purchase 70 percent of their parts from Brazilian firms. d) to purchase 60 percent of their parts from Brazilian firms. e) to purchase 50 percent of their parts from Brazilian firms. Answer: c
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21. United Nations Conference on Trade and Development (UNCTAD) was established in 1964 as a a) international institution dedicated to eliminating protectionism in developing countries in the world trade system. b) international institution dedicated to promoting protectionism in developing countries in the world trade system. c) international institution dedicated to promoting the interests of developing countries in the world trade system. d) international institution dedicated to replacing colonialism in the world trade system. e) international institution dedicated to promoting the interests of advanced industrial countries in the world trade system. Answer: c 22. The Group of 77 was a trade alliance of developing country governments that a) tried to use GATT rather than UNCTAD to pursue international rules that would increase their share of the gains from trade. b) tried to use UNCTAD rather than GATT to pursue international rules that would increase their share of the gains from trade. c) pressured advanced industrial countries to decrease trade barriers to protect their commodity export interests from competition. d) pressured other developed countries to improve the terms of trade with each other. e) created a finance mechanism, funded largely by the advanced industrialized countries, to purchase their commodities when their prices reached above a ceiling. Answer: b 23. The New International Economic Order (NIEO), according to Oatley, represented a new attempt by developing countries a) to gain acceptance of a set of radical demands to alter the operation of the international economy. b) which was largely successful because the establishment and maintenance of a cohesive coalition. c) which was largely unsuccessful in spite of OPEC governments’ willingness to use their oil power to reform the trade system for their greater benefit. d) which was largely successful because of debt assistance by the IMF and World Bank.
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e) which only disappeared from the international agenda when it was replaced in 2000 by the Millennium Development Goals. Answer: a 24. According to Oatley, the failure of the NIEO has NOT been attributed to the fact that a) developing countries were unable to establish and maintain a cohesive coalition. b) advanced industrialized countries were able to divide the Group of 77 by offering limited concessions to a small number of governments in exchange for defection from the broader group. c) OPEC governments were not willing to use their oil power to help other developing countries. d) many developing countries were facing serious balance-of-payments problems. e) LDCs got greater control over multinational corporations operating in their countries. Answer: a
25. Members of the UN agreed in 2015 that for the next 15 years they would focus their development policies on Sustainable Development Goals (SDGs). The SDGs place greater emphasis a) on industrial development b) on attaching lesser importance to protection of human rights. c) on cutting the numbers living in poverty in half by 2040. d) on cutting the numbers living in poverty in half by 2050. e) on sustainable development Answer: e
True-False Questions 1. Trade and development policies in developing countries after WW I have been strongly shaped by political competition between former colonial and nationalist agriculture. Answer: False 2. According to structuralists in the post WWII era, markets in developing countries would not naturally reallocate sufficient resources from agriculture to manufacturing because they were still dominated by export-oriented agricultural interests. Answer: False
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3. The push toward decolonialization in Africa in the 1950s was led by a coalition of indigenous professionals who had acquired positions in the administration of colonial economic and political rule. Answer: True 4. Most governments of developing countries after World War II believed that higher standards of living were not possible with most people living on subsistence agriculture. Answer: True 5. The structuralists’ assertion that coordination problems would prevent investment in manufacturing was not a serious problem for governments intent on industrialization. Answer: False 6. People employed in the agricultural sector, who consumed these manufactured goods, paid more for them than they would have in the absence of tariffs and quantitative restrictions. Answer: True 7. Brazil’s ISI strategy helped transform the country’s economy in a short time. Answer: True 8. Developing governments’ belief that industrialization would not occur in their countries if they participated in the GATT-based system played an important role in shaping their trade and development policies. Answer: True 9. The GSP agreements agreed to by advanced industrial countries in the late 1960s were of limited importance because they used limited quotas of goods that could enter under preferential tariff rates. Answer: True 10. Structuralism claimed that trade based on GATT rules would only make industrialization harder to achieve. Answer: True
Essay/Discussion Questions 1. Explain how the collapse of agriculture during the Great Depression brought to power governments supported by import-competing interests.
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2. Explain how landowner dominated politics prior to WW II differed considerably across regions in the developing world. 3. Explain how and why structuralism became the dominant theory of development economics. 4.
Explain the coordination problems identified by structuralist theory and the suggested remedies for government intervention.
5. Explain the importance of terms of trade in Singer-Prebisch theory. Has research confirmed these hypotheses? 6. Explain the costs and benefits of secondary ISI. Illustrate your answer with examples from different countries. 7. Explain how and why governments transferred the costs of import substitution industrialization to agriculture in developing countries. 8. Discuss how trade relations between the advanced industrial countries and the developing world revolved around competing conceptions of international trade rules embodied in the GATT and UNCTAD systems. 9. Discuss the successes and failures of the NIEO reforms suggested by the Group of 77 in the 1970s. 10. Discuss the goals and problems of Sustainable Development Goals. Is it reasonable to think policies based on these plans will be supported by foreign aid offered by the international community? Why/why not?
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Chapter 7: Trade and Development II: Economic Reform Multiple Choice Questions 1. A current account deficit means that a) a country is exporting more than it is importing. b) a country is importing more than it is exporting. c) a country is unable to pay off its loans. d) a country is making less money on its exports than on its imports. e) a government is spending more than it is receiving in revenues. Answer: b 2. Import substitution industrialization (ISI) gave rise to trade deficits primarily because a) it generated considerable exports but did not generate sufficient imports. b) export revenues were adversely affected by negative terms of trade. c) import revenues were adversely affected by negative terms of trade. d) governments were unable to continue to subsidize state owned enterprises. e) it generated a considerable demand for imports but did not generate sufficient exports. Answer: e 3. According to Oatley, government should maintain an exchange rate that a) equalizes the prices of goods in the domestic and foreign markets. b)c reates economies of scale but not economies of experience. c)i s sufficient to satisfy domestic consumption. d)s ubsidizes the prices of goods in the domestic markets. a) allows foreign markets to overprice exports. Answer: a 4. According to Oatley, policies that government used to promote industrialization weakened agriculture to such an extent that a) heavy tax burdens caused massive rural protests. b) farmers left the rural areas for urban areas in massive numbers in search of new jobs. c) the fall in payments received by government marketing boards caused severe budget deficits. d) farmers had to smuggle their goods to foreign countries to avoid taxes. e) falling prices gave farmers little incentive to increase agricultural production. Answer: e
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5. Microeconomic inefficiencies created by ISI policies were aggravated by the tendency of developing country governments to a) maintain undervalued exchange rates. b) maintain overvalued exchange rates. c) depreciate currency under fixed rates of exchange. d) depreciate currency under floating rates of exchange. e) inflate the value of foreign currencies. Answer: b 6. ISI policies in the long run constrained the ability of governments to implement reforms because a) they created too many veto players to block change. b) they raised consumer expectations to unreasonable levels. c) they raised producer profit expectations to unreasonable levels. d) state owned enterprises became too corrupt to manage. e) government subsidies were too popular with urban elites. Answer: a 7. Rent-seeking is the term used to describe a) efforts by public officials to use the political system to achieve a higher-thanmarket return on an economic activity. b) efforts by public officials to use the economic system to achieve a higherthan-market return on a political activity. c) efforts by private actors to use the political system to achieve a higher-thanmarket return on an economic activity. d) efforts by public officials to pressure producers to pay a higher-than-average taxes on an economic activity. e) any corrupt practices associated with government interference in the market. Answer: c 8. According to Oatley, governments promoted ISI policies so that a) they could require all citizens who wanted to import something to get special permits. b) import permits would make goods more available to consumers who paid bribes. c) importers could obtain rent on the sale of import permits. d) government officials could obtain rent on the sale of import permits. e) a maximum number of public officials could obtain rent through political bribes.
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Answer: d 9. According to Oatley, governments in developing countries were unwilling to scale back their industrialization strategies because a) it was unclear what model they should shift to because of the myth of adverse terms of trade. b) market-oriented development strategies would reduce corruption. c) they preferred to obtain higher rents by borrowing from foreigners. d) they were unwilling to fight against the GATT system. e) foreign lenders would eventually expose their corruption. Answer: a 10. The East Asian model was praised by those opposed to ISI trade strategies because a) ISI trade deficits were declining in Latin America and sub-Saharan Africa. b) per capita income grew almost three times faster than in Latin America. c) the power of commodity exporters was reduced. d) it reduced current account deficits caused by excessive imports. e) it eliminated tariffs and non-tariff barriers. Answer: b 11. According to Oatley, most East Asian development scholars agree a) about the relative unimportance of the state in creating export-oriented industries. b) that the success of export-oriented strategies is a superior work ethic by Asians. c) export-oriented strategies produced superior results compared to ISI. d) stable macroeconomic environments can only be produced by neoliberal approaches to development. e) East Asian success is due primarily to state-led industrial policies. Answer: c 12. East Asian governments were more successful in their development strategies than those in Latin America and Africa because a) they shifted to export-oriented substitution once they had exhausted the gains from easy ISI. b) they shifted to export-oriented substitution without resorting to easy ISI. c) they shifted to export-oriented substitution once they had exhausted the gains from commodity exports in agriculture. d) they shifted to secondary ISI once they had exhausted the gains from easy ISI.
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e) they were not interested in rent seeking trade strategies. Answer: a 13. According to the World Bank and the IMF, East Asia experienced greater economic development compared to Latin America because a) states played a large role and markets played a small role in allocating resources. b) markets played a large role and states played a small role in allocating resources. c) of cheap labor and borrowing in international financial markets rather than domestic savings. d) high inflation promoted high savings rates and investment. e) governments intervened in exchange markets to enhance domestic exports. Answer: b 14. In what has come to be called the East Asian model of development, economic development is conceptualized as a series of distinct stages. In the first stage, a) currency exchange policy promotes consumer imports. b) industrial policy promotes capital-intensive heavy industry. c) industrial policy promotes labor-intensive heavy industry. d) industrial policy promotes capital-intensive light industry. e) industrial policy promotes labor-intensive light industry. Answer: e 15. In what has come to be called the East Asian model of development, economic development is conceptualized as a series of distinct stages. In the second stage, a) industrial policy promotes capital-intensive heavy industry. b) industrial policy promotes labor-intensive light industry. c) industrial policy promotes capital-intensive light industry. d) industrial policy promotes high tech consumer durables and industrial machinery. e) industrial policy promotes computers, robotics, and biotechnology. Answer: a 16. In what has come to be called the East Asian model of development, economic development is conceptualized as a series of distinct stages. In the third stage, a) industrial policy promotes labor-intensive light industry. b) industrial policy promotes capital-intensive heavy industry. c) industrial policy promotes high tech consumer durables and industrial machinery.
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d) industrial policy promotes labor-intensive heavy industry. e) industrial policy acquires high technology imports and foreign capital. Answer: c 17. By the mid-1980s, in Taiwan and South Korea, a) textiles were still their largest exports. b) steel and petrochemicals were their largest exports. c) steel and ship building were their largest exports. d) electronics and automobiles were their largest imports. e) electronics and automobiles were their largest exports. Answer: e 18. East Asian governments used industrial policies to a) increase the cost of investment in targeted industries. b) create incentives to export. c) reduce protection on infant industries. d) promote the export of skilled labor. e) use credit to assist importers’ input suppliers. Answer: b 19. As China’s market economy grew during the last 40 years, a) a market economy gradually has emerged in place of the previous statecentered economy. b) the state centered economy has maintained its dominance. c) a market economy has been dominated by multinational foreign corporations. d) a market economy quickly has replaced the previous state-centered economy. e) a market economy has been aided by technological assistance from Russia. Answer: a; Chap 7: Page 12; Understanding 20. In the 1980’s, China a) experienced substantial rural-to-urban migration of about 50 million people each year. b)e nterprises were increasingly required to sell at state-set prices through state agencies. c)g overnment-maintained production subsidies but required enterprises to turn to banks for working capital. d)a ttracted foreign investment by creating Special Economic Zones that allowed more market-based activity than was permitted in the rest of the economy. e)e xpanded the number of companies allowed to conduct foreign trade from 12 to more than 20,000.
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Answer: d 21. 1973 and 1982 developing countries were also harmed by three international shocks which included a) increase in oil prices, increase in commodity imports and higher interest rates on the foreign debt. b) increase in oil prices, reduction in their terms of trade and lower profits on simple ISI products. c) increase in oil prices, improvement in their terms of trade and higher interest rates on the foreign debt. d) increase in oil prices, reduction in their terms of trade and lower interest rates on the foreign debt. e) increase in oil prices, reduction in their terms of trade and higher interest rates on the foreign debt. Answer: d 22. According to Oatley, the international institutions of the IMF and the World Bank linked financial assistance to economic reforms that a) reduced the ability of governments to spend on education and health care. b) increased the role of the market in the economy. c) drastically reduced the wages of domestic workers. d) dramatically increased political instability. e) increased the interest rates on foreign debt to discourage government spending. Answer: b 23. World Bank structural adjustment loans were largely dependent on developing countries changing policies to a) avoid the strategies at the core of the East Asian development model. b) privatize state-owned enterprises. c) refinance foreign debt with higher interest rates. d) raise taxes to reduce budget deficits. e) reduce dependence on oil exports. Answer: b 24. According to Oatley, the economic consequences of World Bank imposed structural adjustment policies that a) were not very hard to implement because markets adjustments are easy. b) lead to the overthrow of governments that opposed ISI strategies. c) lead to huge profits by buyers of state-owned enterprises.
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d) hurt producers in export-competing sectors. e) lead to large job losses because of privatization and civil-service reforms. Answer: e 25. The difference between the “Washington Consensus” and the “Beijing Consensus” is that a) There is virtually no difference between the policies. b) The “Washington Consensus” espoused decentralized market fundamentalism while the “Beijing Consensus” advocates a return to a market-led development strategy. c) The “Washington Consensus” espoused centralized market fundamentalism while the “Beijing Consensus” advocates a return to a state-led development strategy. d) The “Washington Consensus” espoused decentralized market fundamentalism while the “Beijing Consensus” advocates a return to a stateled development strategy. e) The “Washington Consensus” state-led development strategy while the “Beijing Consensus” advocates a return to an industrial substitution policy strategy. Answer: d 26. The adoption of neoliberal reforms in the developing world has a) not altered the dynamics of global economic exchange. b) resulted in the capital-intensive aspects of production now shifting to developing societies. c) resulted in the labor-intensive aspects of production being shifted to developing societies. d) brought substantially higher incomes to almost all groups. e) resulted in larger incomes redistributed among structuralist groups. Answer: c
True-False Questions 1. Domestic politics in support of urban residents aggravated the budget deficits generated by ISI. Answer: True 2. ISI also generated an important imbalance in persistent current-account deficits. Answer: True
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3. The decline in agricultural production caused by government promotion of industrialization was most severe in sub-Saharan Africa. Answer: False 4. According to Oatley, one of the worst features of ISI was the opportunities it created for government corruption. Answer: True 5. According to Oatley, the main reason that the East Asian model was so successful was that the Taiwanese and South Korean governments eliminated most import tariffs and non-tariff barriers. Answer: False 6. According to the World Bank and the IMF, East Asia succeeded because markets played a large role, and states played a small role in allocating resources. Answer: True 7. As China’s market economy grew, the relative importance of the planned economy shrank. Answer: True 8. In South Korea, the government nationalized the banks in the early 1960s and in the ensuing years fully controlled investment capital. Answer: True 9. Where colonial mortality rates were high, colonists were more likely to establish permanent settlements and thus were more likely to create inclusive institutions that promoted economic development. Answer: False 10. Inclusive institutions have political and economic characteristics that encourage individual initiative and sustained economic growth. Answer: True
Essay/Discussion Questions 1. Explain why most developing countries reversed 35 years of post WW II structuralist development policies to adopt neo-liberalism and export-oriented industrialization.
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2. How did the search for urban political support in the wake of the failure of exportoriented agriculture during the inter-war period lead to budget crises under ISI development policies? 3. How did ISI inefficiencies reinforce the tendency of most governments to maintain overvalued exchange rates? 4. Why was the East Asian export-oriented strategy so successful for the countries that adopted it? What effect did it have on the decline of manufacturing labor in advanced industrial states? 5. Explain how the administration of ISI had created opportunities for rent seeking and other corrupt practices. 6. Compare and contrast the strengths and weaknesses of the two different explanations for East Asian success. 7. Explain the role of World Bank/IMF structural adjustment mandates on large job losses through privatization and cut backs in government spending. 8. What are the costs and benefits of the “Washington Consensus” model of development policy versus the “Beijing Consensus” model? 9. Explain the success of the three pillars of China’s economic reforms in spite of the inefficient state-owned sector that still employs tens of millions of people. 10. How have Brazil, India and China (BICs) changed the direction of the WTO and greater trade liberalization talks in recent years?
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Chapter 8: Multinational Corporations in the Global Economy Multiple Choice Questions 1.
Multinational corporations (MNCs) are a) not the primary drivers of and beneficiaries from globalization. b) the primary drivers of but not the beneficiaries from globalization. c) the primary drivers of and beneficiaries from globalization. d) the beneficiaries from globalization but not its primary drivers. e) a recent invention. Answer: c
2. Since 1969, the number of firms engaged in international production as increased a) from 5,300 to 90,000 in 2010. b) from 6,300 to 120,000 in 2010. c) from 7,300 to 150,000 in 2010. d) from 4,300 to 100,000 in 2010. e) from 7,300 to 100,000 in 2010. Answer: e 3. A national company becomes an MNC when it a) places multiple production facilities in multiple countries under the control of a single corporate structure. b) places multiple production facilities in multiple countries under the control of multiple corporate structures. c) uses foreign workers in multiple countries under the control of a single corporate structure. d) Pays taxes in multiple countries. e) places multiple production facilities in a single country under the control of multiple corporate structures. Answer: a
4. According to Oatley, the U.S.-based company is regularly ranked among the world’s largest MNCs. It controls some 250 plants located in 26 countries in North and South America, Europe, and Asia. a) Microsoft b) AT&T c) Exxon-Mobil d) Ford
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e) General Electric Answer: e 5. According to UNCTD figures in the Oatley book, the world’s stock of FDI, the total amount of foreign investment in operation, has grown from a) $693 billion in 1980 to $36.5 trillion at the end of 2019. b) $593 billion in 1980 to $31.5 trillion at the end of 2019. c) $693 billion in 1980 to $29.5 trillion at the end of 2019. d) $493 billion in 1980 to $36.5 trillion at the end of 2019. e) $693 billion in 1980 to $40.5 trillion at the end of 2019 Answer: a 6. According to Table 8.3 in the Oatley book, the region of the world with the highest foreign direct investment inflows in 1990-2019 was a) Europe. b) North America. c) Southeast Asia. d) Latin America. e) Africa. Answer: a 7. According to the Oatley book, the United Nations (UN) estimates that MNCs currently (2019) a) account for 1/4 of global exports and employ some 77 million people worldwide. b) account for 1/3 of global exports and employ some 82 million people worldwide. c) account for 1/3 of global exports and employ some 107 million people worldwide. d) account for ½ of global exports and employ some 107 million people worldwide. e) account for ½ of global exports and employ some 82 million people worldwide. Answer: e 8. In 2020, developing countries accounted for about a) 7 of top 100 MNC parent corporations. b) 11 of top 100 MNC parent corporations. c) 13 of top 100 MNC parent corporations. d) 15 of top 100 MNC parent corporations.
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e) 17 of top 100 MNC parent corporations. Answer: b 9. MNC investment in the developing world has increased during the last 30 years, a) but the majority of this investment has been concentrated in a very few number of developing countries. b) and the majority of this investment has been spread out among many developing countries. c) and the majority of this investment has gone to the Middle East. d) and the majority of this investment has gone to the Africa. e) and the majority of this investment has gone to Asia. Answer: a 10. According to their critics, the ability of MNCs to move production wherever they want is gradually eroding a broad range of government regulations designed to a) protect corporate profits and workers. b) protect workers, consumers, but not the environment. c) protect foreign workers and social diversity. d) protect workers, consumers, and the environment. e) protect consumers and the environment but not union workers. Answer: d 11. Falling trade barriers and improvements in communications technology have made a) it substantially harder for firms to internationalize their activities. b) it substantially easier for firms to internationalize their activities. c) very little difference for firms wishing to internationalize their activities. d) it more likely for MNCs to systematically exploit workers worldwide. e) it easier for MNCs to avoid paying taxes on their international activities. Answer: b 12. Locational advantages are based on which combination of the following specific country characteristics: a) a large reserve of natural resources, a large local market and efficiency opportunities. b) a small reserve of natural resources, a large local market and efficiency opportunities. c) a small reserve of natural resources, a small local market and efficiency opportunities. d) a large reserve of natural resources, a small local market and efficiency opportunities.
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e) a small reserve of natural resources, a large local market but few efficiency opportunities. Answer: a 13. According to Oatley, in 2016 the top industrial sector of the largest MNCs was in a) electronics b) petroleum/mining. c) pharmaceuticals d) telecommunications. e) automobiles. Answer: b 14. Locational advantages for market-oriented investments are based on the ideal combination of a) small fast growing markets, large number of indigenous firms in that industry and tariff/nontariff barriers. b) large fast growing markets, small number of indigenous firms in that industry and no tariff/nontariff barriers. c) large fast growing markets, small number of indigenous firms in that industry and tariff/nontariff barriers. d) large fast growing markets, large number of indigenous firms in that industry and no tariff/nontariff barriers. e) large slow growing markets, small number of indigenous firms in that industry and tariff/nontariff barriers. Answer: c 15. Horizontal integration occurs when a a) firm creates singular country production facilities, each of which produces different good or goods. b) firm creates multiple production facilities, each of which produces the same good or goods. c) firm creates multiple production facilities, each of which produces different good or goods. d) firm creates singular country facilities, each of which produces the same good or goods. e) firm creates multiple production facilities, in multiple countries but with different technologies. Answer: b 16. Intangible assets are
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a) not very important when cost advantages arise from horizontal administrative integration. b) something whose value is not very important. c) assets whose value is derived from locational advantages that are crucial to the production in a particular industry. d) assets that are easy to sell or license to other firms at a price that accurately reflects their true value. e) assets that are difficult to sell or license to other firms at a price that accurately reflects their true value. Answer: e 17. Specific assets a) are investments that are part of a general economic relationship. b) are investments that are dedicated to a particular short-term economic relationship. c) are investments that are dedicated to a particular long-term economic relationship. d) are assets whose value is derived from locational advantages that are crucial to the production in a particular industry. e) are assets that create incentives for horizontal integration because they make it easier to write and enforce contracts. Answer: c 18. We expect to find the most amount of MNC activity when a) locational advantages exist, but there are neither intangible nor specific assets. b) no locational advantages exist, but there are intangible and specific assets. c) no locational advantages exist, and there are neither intangible nor specific assets. d) locational advantages exist, and there are both intangible and specific assets. e) there are vertically integrated intangible assets. Answer: d 19. Foreign investment a) allows a country only to grow when it does not compete with its domestic savings. b) allows a country to enjoy faster growth than would be possible if it were forced to rely solely on its domestic savings. c) only allows as much growth as desired by foreign management.
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d) usually replaces domestic savings leading to excessive external indebtedness. e) is usually the least stable and most burdensome for host countries. Answer: b 20. Positive externalities arise when a) economic actors in the host country that are directly involved in the transfer of technology from a MNC to a local affiliate do not benefit from this transaction. b) economic actors in the host country that are not directly involved in the transfer of technology from a MNC to a local affiliate do not benefit from this transaction. c) economic actors in the home country that are directly involved in the transfer of technology from a local affiliate to a MNC also benefit from this transaction. d) economic actors in the home country that are not directly involved in the transfer of technology from a local affiliate to a MNC do not benefit from this transaction. e) economic actors in the host country that are not directly involved in the transfer of technology from a MNC to a local affiliate also benefit from this transaction. Answer: e 21. When foreign direct investments are made part of a global production network such integration a) insures that import opportunities will not be available to indigenous producers. b) insures that MNCs will reduce the amount of funds available for investments in the host country. c) insures that revenues generated by the local affiliate will not be used to enhance the welfare of the host country. d) creates export opportunities that would be otherwise unavailable to indigenous producers. e) guarantees that technology will not eventually be transferred to the host country. Answer: d 22. Many MNCs have opted to remove many of their international transactions from the market and place them within a single corporate structure because a) they are usually required to by the host country governments.
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b) they are usually required to by the home country governments. c) they can usually earn substantially higher incomes by internalizing intangible and specific assets. d) they will not be held accountable for raising the general welfare of their host countries. e) this helps them stay clear of intrusive host government regulations. Answer: c
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Workers tend to have more rights and labor abuses are less frequent as a) the skill-level of the industry increases. b) the skill-level of the industry decreases. c) the skill-level of the industry does not change. d) skill-level of the industry becomes more urban. e) skill-level of the industry becomes more indigenous. Answer: c
24. Which of the following is probably NOT true? A MNC might a) consume scarce local savings. b) replace local firms. c) refuse to transfer technology. d) and repatriate all of its earnings. e) extend local. managerial control. Answer: e
25. Most analysts of MNC activities believe that FDI a) can benefit the host country and the investing firm. b) can benefit the investing firm but seldom the host country. c) usually does not benefit the host country and the investing firm. d) creates a lot of host country debt. e) usually increases the skill level of women workers. Answer: a
True-False Questions
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1. Multinational corporations (MNCs) highlight the tensions inherent in an economy that is increasingly organized along global lines and political systems that continue to reflect exclusive national territories. Answer: True 2. MNCs started as British creations that first appeared shortly before WW I. Answer: False 3. In the last forty years, the number of firms engaged in international production has increased about tenfold. Answer: False 4. Although MNCs have a global reach, their activities are overwhelmingly concentrated in the advanced industrial countries. Answer: True 5. During the last decade, Nigeria has received the largest share of these investment flows, capturing 30 percent of the total inflows over the period. Answer: False 6. In 2020, only eleven developing-country MNCs ranked among the world’s 100 largest MNCs. Answer: True 7. According to Oatley, the prevalence and organization of MNCs is puzzling to neoclassical economists. Answer: True 8. Locational advantages for market-oriented investments arise from the presence of large deposits of a particular natural resource in a foreign country. Answer: False 9. Locational advantages in efficiency-oriented investments arise from the availability at a lower cost of the factors of production that are used intensely in the production of a specific product. Answer: True 10. Vertical integration refers to instances in which firms internalize their transactions for intermediate goods. Answer: True
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Essay/Discussion Questions 1. Describe and explain how MNCs have grown so quickly in the past 40 years. 2. Explain the role that foreign direct investment (FDI) has played in the global economy. 3. Why do MNCs remain overwhelmingly concentrated in the advanced industrial countries? 4. Explain where, how and why some developing countries are becoming both the host of foreign firms and home to domestic MNCs. 5. Explain the concept of locational advantages and historically their three specific country characteristics. 6. Describe, explain and give examples of the differences between market imperfections and locational advantages of MNCs. 7. Describe, explain and give examples of the differences between horizontal and vertical integration of the activities of MNCs. 8. Describe the dilemmas for host countries of inviting MNC foreign investments into their economies. 9. Explain and give examples of the differences between positive and negative externalities as a result of MNC activity in a host country. 10. Discuss the relationship between labor and foreign capital in the developing world. Include in your answer the effect on women.
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Chapter 9: The Politics of Multinational Corporations Multiple Choice Questions 1. The politics of MNCs emerge from the competing interests of a) host countries of MNCs. b) home countries of MNCs. c) the MNCs themselves. d) host countries and home countries. e) host countries and home countries and the MNCs themselves. Answer: e 2. In the immediate postwar era, according to Oatley, the fifteen largest agricultural MNCs controlled approximately a) 10% of developing countries’ exports. b) 30% of developing countries’ exports. c) 50% of developing countries’ exports. d) 80% of developing countries’ exports. e) 95% of developing countries’ exports. Answer: d 3. The central political concern for developing countries regarding MNCs ownership of critical natural-resource industries was that a) it compromised the hard-won national autonomy achieved in the struggle for independence. b) governments would be unable to use these resources to promote ISI strategies. c) extractive industries did not usually transfer technology. d) extractive industries used primarily foreign workers so that skills were obtained by domestic workers. e) extractive industries accelerated the depletion of non-renewable resources. Answer: a 4. Nationalization was common during the late 1960s and the first half of the 1970s. Nationalizations occurred most often in a) banking and transportation. b) banking and public utilities. c) transportation and extractive industries. d) banking and extractive industries. e) extractive industries and public utilities. Answer: e
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5. Which of the following regulations were not performance requirements on MNC affiliates? a) Required percentage of inputs from domestic suppliers. b) Required percentage of exports. c) Required percentage of research and development inside host country. d) Limits on repatriation of profits. e) Limits on access to local capital markets. Answer: d 6. Export-processing zones are industrial areas set aside for MNCs with special rules or subsidies. Foreign firms based in EPZs are primarily allowed to a) import components free of taxes, as long as all of their output is exported. b) pay workers less than elsewhere in the country. c) pay workers more than elsewhere in the country. d) Ignore safety and environmental regulations. e) import components for assembly free of taxes, as long as none of their output is exported. Answer: a 7. Only France and Japan a) have been more open to FDI than other advanced industrial countries. b) required explicit government approval for manufacturing investments by foreign firms. c) excluded foreign firms from owning industries deemed “critical”. d) have been more restrictive of FDI than developing countries. e) prohibit foreign firms from participating in defense-related industries. Answer: b 8. Sovereign wealth funds (SWFs) are a) royalty-owned funds that purchase private assets in foreign markets. b) royalty-owned funds that purchase public assets in foreign markets. c) government-owned funds that purchase public assets in domestic markets. d) government-owned funds that purchase private assets in domestic markets. e) government-owned funds that purchase private assets in foreign markets. Answer: e 9. From a global perspective, sovereign wealth funds are a) medium sized, but with five percent of total global assets, not yet significant players in global finance.
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b) small sized, and but with only two percent of total global assets, almost insignificant players in global finance. c) large sized, but with fifteen percent of total global assets, a major force to be reckoned with as players in global finance. d) medium sized, but with seven percent of total global assets, somewhat more important as players in global finance. e) large sized, but with ten percent of total global equities, not dominant players in global finance. Answer: e 10. Few SWFs are open about a) the strategies that motivate their investment decisions or about the assets that they own. b) political rather than economic objectives. c) social rather than economic objectives. d) economic rather than political objectives. e) domestic rather than international objectives. Answer: a 11. Japanese restrictions on inward direct investment were designed to a) compensate for lack of transparency in operations. b) encourage technology transfers c) protect against security threats. d) protect against economic threats e) protect against destabilizing trading activity. Answer: b 12. Governments that have refrained from promoting active industrial policies have generally a) not restricted foreign ownership of sensitive industries. b) not restricted foreign ownership of cutting edge high technology industries. c) attempted to protect national firms from competition by restricting foreign investment. d) restricted foreign ownership of critical industries. e) less open to FDI than most developing countries. Answer: d 13. Obsolescing bargaining power happens when a) the MNC can easily remove its fixed investment from the country. b) uncertainty about of the return on the investment stays high. 3
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c) technology has been significantly transferred to the host country workers. d) technology has not been significantly transferred to the host country workers. e) the MNC has monopoly control over the necessary capital. Answer: c Page 10 14. MNCs usually enjoy more bargaining power than host countries in low-skilled laborintensive manufacturing industries because a) only a few developing countries have excess low skilled labor. b) investments in low-skilled manufacturing entail a relatively low amount of fixed capital. c) investments in low-skilled manufacturing cannot be readily moved out of a particular country. d) technology in many manufacturing industries changes rapidly and, therefore, is easily transferred to host workers. e) like natural-resource investments, manufacturing investments can become hostages. Answer: b 15. Locational incentives are packages host countries offer to MNCs that a) decrease the profits of a particular investment. b) increase the costs of that investment. c) increase the risk of that investment. d) provide subsidized loans for that investment. e) depreciate their investments at slower rates. Answer: d 16. Advanced industrial countries have been less vulnerable to foreign domination than developing countries because a) developing countries have larger economies. b) developing countries have more diversified economies. c) foreign affiliates are more likely to face competition from domestic firms in a developing country. d) developing countries have felt less compelled to regulate MNC activity. e) foreign affiliates are more likely to face competition from domestic firms in an advanced industrial country. Answer: e 17. The two largest foreign investors during the last 140 years, the United States and Great Britain, have also been a) the most closed to inward foreign investment. 4
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b) reluctant to invite retaliation that would make to harder for their own firms to invest abroad. c) the most open to invite retaliation that would make to easier for their own firms to invest abroad. d) more narrowly based on host-country issues. e) the most closed to outward foreign investment. Answer: b 18. Different attitudes about the government’s role in the national economy have translated into different approaches to FDI. According to Oatley, at this time we are likely to see a) a shift back to more restrictive practices in developing countries. b) most developing countries becoming more vulnerable to foreign domination. c) developing countries still attracting more foreign investment in natural resources than manufacturing. d) no evidence of an impending shift back toward interventionist strategies. e) developing countries continue to make it harder for foreign firms to participate in the local economy. Answer: d 19. The reason why there are no comprehensive international investment rules is that a) governments have never tried to create multilateral rules. b) the OCED and WTO rules have already created effective comprehensive guidelines. c) conflict between capital-exporting advanced industrial countries and the capitalimporting developing countries has prevented agreement on such rules. d) conflict between capital-exporting developing countries and the capitalimporting advanced industrial countries has prevented agreement on such rules. e) MNCs have already created rules on their own initiative. Answer: c 20. Historically, international rules governing FDI have been based on the following legal principles: a) Foreign investments are private property but are treated less favorably than domestic private property. b) Governments have no right to expropriate foreign investments for a public purpose. c) Governments must compensate the owner for the full value of the expropriated property. d) The home country of the foreign investors must forcefully retaliate in the disputed host country’s economy. 5
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e) Expropriation, like foreign loan defaults, must be punished with no new investment for seven years. Answer: c 21. The International Trade Organization’s (ITO) experience with international legal protection for foreign investments is important because a) it firmly established the Calvo doctrine as a legal mandate. b) its success established international rules governing FDI. c) the GATT rules became the prevailing guide since they had a lot to say about foreign investment. d) its failure reflects a basic conflict that has dominated international discussions about FDI rules to this day. e) support for its investment articles from American business proved a major reason for the ITO’s success in gaining US congressional approval. Answer: d 22. The United Nations’ Resolution on Permanent Sovereignty over Natural Resources was passed in 1962. This resolution a) recognized the right of host countries to exercise full control over foreign firms extracting those resources. b) recognized the right of foreign firms to exercise full control over their operations extracting those resources. c) recognized the right of foreign firms to determine the appropriate compensation in the event of expropriation. d) was formally rejected by capital-exporting governments in 1982. e) was successfully re-negotiated in 1992. Answer: a 23. The typical Bilateral Investment Treaties (BITs) system a) is highly asymmetric b) has balancing measures that require a firm’s imports be offset by its exports. c) offers strong protection to MNCs as well as expand the rights of host countries. d) does not limit expropriation. e) emerged as the predominant approach to governing FDI beginning in the late 1970s. Answer: a 24. The Multilateral Agreement on Investment (MAI) failed to be negotiated because of
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a) disagreements among OECD governments and to strong and vocal opposition from groups outside the process. b) disagreements among OECD governments and to strong and vocal opposition from groups inside the process. c) agreements among OECD governments but strong and vocal opposition from groups outside the process. d) United States pressure to include health and environmental standards. e) disagreements among OECD governments about national treatment and fair compensation. Answer: a 25. Regulatory arbitrage is seen by critics as a “race to the bottom”. This means that a) MNCs may shift activities out of stringent countries into less stringent countries. b) MNCs may shift activities out of less stringent countries into more stringent countries. c) MNCs will demand no regulations on their activities. d) MNCs will refuse to follow regulations that are imposed on domestic firms. e) countries will not compete with each other for the least regulations on MNCs. Answer: a
True-False Questions 1. Restrictions on 100-percent foreign ownership have been lifted in most countries. Answer: True 2. The tension inherent in overlapping decision-making frameworks shapes the domestic and international politics of MNCs. Answer: True 3. Even though both developed and developing countries regulate MNC activities, developed countries have relied far more heavily on such practices. Answer: False 4. Most developing countries entered the postwar period as primary-commodity exporters often controlled by MNCs who kept the profits the exports generated. Answer: True 5. Nationalizations in the late 1960s and first half of the 1970s occurred most often in the extractive industries and the banking sector. Answer: False 7
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6. Governments imposed performance requirements on local affiliates in order to promote a specific economic objective. Answer: True 7. Most developing countries have placed more restrictions on MNCs since the 1980s. Answer: False 8.
Though many predicted that the rapid growth seen in the early 2000s would continue, the sharp decline of energy prices after 2009 hit the SWFs hard. Answer: True
9. The more the host country has exclusive control over the things the MNC values, the more bargaining power the MNCs has. Answer: True 10. When a MNC can no longer easily remove its fixed investment from a host country and the investment becomes a hostage it is called an “obsolescing bargain”. Answer: True
Essay/Discussion Questions 1. How has globalization of the world economy changed the political and economic stakes for MNCs and advanced industrial countries? 2. Explain the political dynamics in newly independent developing countries after WW II with MNCs that controlled most of their exports. 3. Discuss how regulation of MNCs has changed over time in developing countries. 4. Explain the costs and benefits of Japan’s unique experience with MNC regulation. How did it differ from other East Asian governments? 5. Describe and explain the political and economic concerns expressed by the growing importance of sovereign wealth funds. 6. Describe and explain conditions of the shifting balances of bargaining power between host countries and MNCs. Which side seems to be gaining power recently?
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7. Explain and analyze the costs and benefits of locational incentives to attract jobs and FDI in advanced industrial states. What role do local versus national governments play? 8. Explain the concept of obsolescing bargains. How are conditions the same or different for advanced industrial or developing countries
9. What is meant by the phrase “the race to the bottom” in MNC regulation? Can governments realistically hold domestic firms to higher standards of working conditions and environmental protection than MNCs? How? 10. Explain and compare the unique and competing interests of host and home countries of MNCs as well as those of the MNCs themselves.
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Chapter 10: The International Monetary System Multiple Choice Questions 1. The sole purpose of the international monetary system is to a) maximize the profits of MNCs. b) protect the rights of home countries of MNCs. c) protect the rights of host countries of MNCs. d) control and regulate the currencies of countries. e) facilitate international economic exchange. Answer: e 2. An exchange-rate system is a set of rules governing how much currencies in the foreign exchange market can a) rise or fall in value. b) be traded for imports. c) be traded for exports. d) be used to make debt payments. e) be regulated by the IMF. Answer: a 3. The most important feature of a fixed exchange-rate system is that a) markets establish the values for currencies. b) central banks establish the values for their currencies. c) governments establish the values for gold and silver. d) governments establish the fixed values for their currencies. e) governments buy and sell their currencies. Answer: d 4. The most important feature of a floating exchange-rate system is that a) markets establish the values for currencies. b) central banks establish the values for their currencies. c) governments establish the values for gold and silver. d) governments establish the fixed values for their currencies. e) governments buy and sell their currencies. Answer: a 5. In a managed float exchange-rate system a) governments commit themselves to maintaining a specific fixed price against other currencies b) governments allow their currencies to float freely. c) governments intervene in the foreign exchange market to influence the value of their currency. d) currency speculation is prohibited. e) governments only change the value of their currency very rarely.
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Answer: c 6. The current account of the balance of payments accounting system has several subcategories. Which of the following is not one of those subcategories? a) The trade account b) The service account c) The income account d) The expense account e) Unilateral transfers account Answer: d 7. The trade in goods subcategory of the balance of payments current account system registers a) imports and exports of manufacturing and agricultural products. b) imports and exports of service sector activities. c) payments such as royalties, interest payments and profits. d) remittances, gifts and foreign aid. e) direct foreign investment. Answer: a 8. Imports and exports of activities such as banking, insurance, transportation and tourism are registered in the a) the trade account. b) the service account. c) the income account. d) the expense account. e) unilateral transfers account. Answer: b 9. The income subcategory of the balance of payments current account system registers a) imports and exports of manufacturing and agricultural products. b) imports and exports of service sector activities. c) payments such as royalties, interest payments and profits. d) remittances, gifts and foreign aid. e) direct foreign investment. Answer: c 10. The current account records a) direct foreign investment transactions between American residents and the rest of the world. b) all current (nonfinancial) transactions between American residents and the rest of the world. c) imports and exports transactions between American residents and the rest of the world. d) capital flows between the United States and the rest of the world.
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e) all of the money spent on goods and services and on investments in factories and houses. Answer: b 11. The capital account of the balance of payments accounting system registers the financial flows between the United States and the rest of the world. Which of the following is not one of its subcategories? a) Total US Owned Assets Abroad b) Foreign assets in the United States c) Balance of Trade d) Balance on Capital Account e) Overall Balance (statistical adjustment) Answer: c 12. In the balance of payments accounting system, if a country a) has a current account deficit, it must have a capital account surplus. b) has a current account deficit, it must have a capital account deficit. c) has a current account surplus, it must have a capital account surplus. d) has a capital account deficit, it must have a current account deficit. e) has a capital account surplus, it must have a current account surplus. Answer: a 13. According to the Oatley book, the balance of payments current account in the United States for 2020 was a) a surplus of $767.8 billion. b) a deficit of $615 billion. c) a deficit of $1.289 trillion. d) a surplus of $2.057 trillion. e) a deficit of $733.0 billion. Answer: b 14. Balance-of-payments adjustments a) in a fixed exchange system, intervention does not change the money supply. b) in a fixed exchange system, intervention changes the money supply. c) in a fixed exchange system, does not change the relative prices of imports and exports between two trading countries. d) in a floating exchange system, does not change through exchange-rate movements. e) in a floating exchange system, internal prices do not remain stable. Answer: b 15. If a government is unwilling to accept occasional deflation and inflation caused by balance of payments adjustments, a) it cannot maintain a fixed exchange rate system. b) it must maintain a fixed exchange system. c) it can both stabilize exchange rates and domestic prices at the same time.
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d) it cannot trade with other countries. e) it cannot maintain a floating exchange system. Answer: a 16. The gold standard emerged at the center of the international monetary system during the a) 1790s. b) 1830s. c) 1870s. d) 1910s. e) 1940s. Answer: c 17. Between 1834 and 1933 the U.S. government exchanged dollar notes for gold at the rate of a) $11.77 per ounce b) $15.88 per ounce. c) $20.67 per ounce d) $22.11 per ounce e) $27.05 per ounce. Answer: c 18. The Bretton Woods system a) represented the first time that governments explicitly made exchange rates a matter of international cooperation. b) was a form of floating exchange rates. c) was not fully implemented until 1949. d) was an attempt to limit domestic economic autonomy after WW II. e) was unsuccessful at establishing exchange rate stability in spite of rapid growth in international trade after WW II. Answer: a 19. The emergence of political constraints on domestic adjustment after WW II a) mandated a return to rigidly fixed exchange rates. b) mandated a return to successful floating rates from the 1930s. c) was not influenced by the emergence of mass-based democracies. d) ruled out a return to rigidly fixed exchange rates. e) weakened the gold standard during a fundamental exchange disequilibrium. Answer: d 20. Exchange restrictions are government regulations that a) require substantial domestic adjustments that governments are unwilling to accept. b) allow a central bank to establish a monopoly on foreign exchange. c) in the 1930s allowed governments to maximize capital flows.
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d) Americans wanted to restore after WW II to liberalize international capital markets. e) were used by the IMF to disallow residents to convert domestic currency into foreign currencies to settle current-account transactions. Answer: b 21. The IMF was intended to limit two kinds of behavior: a) competitive devaluations and abuse of the stabilization fund. b) competitive revaluations and exchange restrictions. c) abuse of the gold standard and conditionality agreements. d) exchange restrictions and conditionality agreements. e) competitive devaluations and conditionality agreements. Answer: a 22. According to Oatley, the American dollar became the post WWII’s foreign exchange system’s reserve currency a) at the insistence of American MNCs. b) as an unintended consequence of the Bretton Woods system. c) as an intended consequence of the Bretton Woods system. d) at the insistence of the IMF. e) because of the inability of the US government to exchange dollars for gold. Answer: b 23. According to Oatley, the fundamental cause of collapse of the Bretton Woods international monetary system was a) dollar overhang. b) unfair advantages of the dollar as the reserve currency. c) unstable gold prices. d) speculative attacks on weak currencies. e) governments’ unwillingness to accept the domestic costs of balance-of payments adjustments. Answer: e 24. According to Oatley, the world currently has a floating exchange rate system because a) markets are recognized as the best means of establishing values of currencies. b) of government corruption that accompanied the timing of dramatic devaluations in a fixed system. c) the Smithsonian realignments solved the problem of economic imbalances. d) of political unwillingness to accept the domestic costs imposed by fixed exchange rates. e) it solved the inflationary problems caused by oil being priced in US dollars. Answer: d 25. The postwar attempt to create an international monetary system that provided exchange-rate stability and domestic economic autonomy was ultimately unsuccessful. The main reason for its failure is not:
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a) that the system was undermined by dollar overhang. b) that it was destroyed by the speculative attacks that ultimately forced governments to abandon fixed exchange rates. c) that to sustain fixed exchange rates, governments had to accept the domestic costs of balance-of-payments adjustment. d) that the United States was unwilling to accept the unemployment that would have arisen from eliminating its deficit. e) that Germany was willing to accept the higher inflation required to eliminate its surplus. Answer: e True-False Questions 1. Most countries have national currencies that are generally accepted as legal payment outside their borders. Answer: False 2. According to Oatley, the international monetary system requires governments to choose between currency stability and national economic autonomy. Answer: True 3. In a pure floating exchange-rate system governments engage in foreign exchange market intervention to influence the value of their currency. Answer: False 4. Fixed exchange-rates provide exchange rate stability but they also prevent governments from using monetary policy to manage domestic economic activity. Answer: True 5. In floating exchange rate systems, balance of payments adjustment occurs through changes in domestic money supply. Answer: False 6. The Bretton Woods system represented the first time that governments explicitly made exchange rates a matter of international cooperation. Answer: True 7. The IMF was created to limit competitive devaluations and currency speculation. Answer: False 8. Because the dollar served as the Bretton Woods system’s primary reserve asset, reducing the number of dollars circulating in the global economy would reduce the liquidity that financed world trade. Answer: True
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9. The Smithsonian realignment solved both the economic imbalances and the political conflicts that were the cause of the Bretton Woods system’s weakening. Answer: False 10. The shift to floating exchange rates reflected agreement among governments that the international monetary system would perform better under floating rates than under fixed rates. Answer: False Essay/Discussion Questions 1. Why do we live in a world where currencies are so unstable? 2. Explain the differences between fixed and floating currency exchange systems. Which is better? 3. What are “balance of payment” devices? How are adjustments made under fixed and floating systems? 4. Why has the United States run such a consistent balance of payments deficit with some countries and a surplus with others? Illustrate your answer with examples of each type. 5. What political reasons explain why most governments prefer domestic price stability over exchange rate stability? 6. Explain each of the four innovations introduced by the Bretton Woods system. 7. How does the IMF stabilization fund work? 8. What is “dollar overhang” and how did it threaten the stability of the Bretton Woods system? 9. What were the three policy options for governments to resolve the payments imbalances that worsened with the onset of the war in Vietnam in 1965? 10. What are the pros and cons of U.S. pressure on Asia to implement the domestic policies required to reduce the size of their current-account surpluses? How and why will Asia continue to resist these pressures?
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Chapter 11: Cooperation, Conflict and Crisis in the Contemporary International Monetary System Multiple Choice Questions 1. The determination to set macroeconomic policy independent of foreign considerations has generated a) small current-account imbalances. b) small cross-border capital flows. c) substantial financial stability. d) calm exchange rate movements. e) episodes of financial instability. Answer: e 2. After 1980, the largest current account deficit in the global economy was held by a) United States. b) Germany. c) Japan. d) United Kingdom. e) China. Answer: a 3. By 1990, the U.S. current account deficit had declined since its high in 1987 to approximately a) $ 50 billion. b) $ 75 billion. c) $ 100 billion. d) $ 125 billion e) $ 150 billion Answer: b 4. The current account imbalances in the United States during the Reagan administration were due to a) cutting taxes and military spending. b) raising taxes and military spending. c) cutting taxes and raising military spending. d) raising taxes and cutting military spending. e) cutting taxes and greater exports. Answer: c 5. A change in fiscal policy will affect the current account so long as
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a) neither private savings nor investment responds to the change in fiscal policy. b) both private savings and investment responds to the change in fiscal policy. c) private savings does respond but investment does not respond to the change in fiscal policy. d) private savings does not respond but investment does respond to the change in fiscal policy. e) there is an investment boom caused by high interest rates. Answer: a 6. By the end of the 1980s, American foreign debt to the rest of the world had increased from a) $ 140 billion to more than $ 1 trillion. b) $ 440 billion to more than $ 2 trillion. c) $ 200 billion to more than $ 3 trillion. d) $ 350 billion to more than $ 2 trillion. e) $ 750 billion to more than $ 2 trillion. Answer: b 7. In order to attract capital flows from current account surplus countries, the United States had to a) maintain relatively low interest rates. b) cut government spending. c) lower taxes. d) maintain relatively high interest rates. e) weaken the value of the dollar. Answer: d : : 8. From a postwar low in 1979, by 1985 the dollar had appreciated by about a) 10%. b) 20%. c) 30%. d) 50%. e) 70%. Answer: d 9. During the early 1980s protectionist pressure caused by the strength of the dollar led to policies that sought to a) eliminate Japanese barriers to American imports and ending what was perceived to be unfair Japanese industrial policy.
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b) eliminate Japanese barriers to American imports and promoting a stronger proimport American industrial policy. c) accept Japanese barriers to American imports and ending what was perceived to be unfair Japanese industrial policy. d) eliminate Japanese barriers to American imports and accepting what was perceived to be unfair Japanese industrial policy. e) eliminate American barriers to Japanese imports and ending what was perceived to be unfair Japanese industrial policy. Answer: a 10. In 1985, in a compact known as the Plaza accord, the US, German, British, French and Japanese governments agreed to a) increase the value of the dollar against the Japanese yen and the German mark by 10-12 percent. b) reduce the value of the dollar against the Japanese yen and the German mark by 10-12 percent. c) reduce the value of the dollar against the Japanese yen and the German mark by 7-8 percent. d) reduce the value of the dollar against the Japanese yen and the British pound by 7-8 percent. e) increase the value of the dollar against the Japanese yen and the German mark by 7-8 percent. Answer: b 11. In 1987, at a meeting in Paris, in a compact known as the Louvre accord, the US, German, British, French and Japanese governments agreed to strive to a) stabilize exchange rates at their current values. b) let the dollar to continue to appreciate. c) let the Japanese yen and German mark to continue to appreciate. d) let the dollar to continue to depreciate. e) let the Japanese yen and German mark to continue to depreciate. Answer: a 12. In the international monetary politics of the 1980s among the advanced industrial countries there were many disagreements because of the impact of domestic politics on macroeconomic policymaking. Essentially, according to Oatley, it came down to a) the US wanting greater openness to American exports while these countries wanted the US to reduce its budget deficits.
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b) the US wanting countries with trade surpluses to revalue their currency to make their exports more expensive while these countries wanted the US to reduce its budget deficits. c) the US wanting burden of adjustment to be borne by countries with trade surpluses while these countries wanted the US to reduce its budget deficits. d) the US being willing to reduce its budget deficits but Germany was unwilling to lower interest rates. e) the US being willing to reduce its budget deficits but Japan was unwilling to be more open to US agricultural exports. Answer: c 13. Between 2000 and the peak in 2006, U.S. home prices rose by a) 40 %. b) 45 %. c) 50 %. d) 55 %. e) 60%. Answer: e 14. In 2008 under Bush, US current-account deficits, as a share of American national income, were larger than those of the 1980s at a) 3 % of GDP at their peak. b) 4 % of GDP at their peak. c) 5 % of GDP at their peak. d) 6 % of GDP at their peak. e) 7 % of GDP at their peak. Answer: d 15. Foreign holdings of non-government securities between 1999 and 2007. a) increased from $1.4 to $5.2 trillion b) increased from $1.8 to $5.5 trillion c) increased from $2.0 to $6.0 trillion d) increased from $2.2 to $6.0 trillion e) increased from $2.4 to $6.2 trillion Answer: e 16. In the past decade, the country with which the United States has had its largest bilateral trade deficit was a) Mexico. b) Canada.
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c) Japan. d) China. e) Germany. Answer: d 17. According to Oatley, governments’ reluctance to alter macroeconomic policies in order to reduce current-account imbalances ultimately sparked a) the decision to return to fixed exchange rates. b) the decision to use floating exchange rates. c) the great financial crisis of 2007-2009. d) a glut of US manufacturing exports. e) China’s policy of pegging the renminbi (RMB) to the dollar. Answer: c 18. The ability to borrow large volumes at low interest rates credit conditions that typically generate a) asset bubbles. b) trade bubbles. c) tax bubbles. d) cash hoarding in advanced industrial countries. e) manufacturing unemployment in advanced industrial countries. Answer: a 19. In the immediate aftermath of the 2008 crisis, many observers predicted that the dollar’s role as the international monetary system’s primary reserve currency a) was likely to be numbered. b) should be replaced by the euro. c) would stay resilient. d) would fall by 10% e) would rise by 10%. Answer: a 20. International monetary politics during the last 40 years have been characterized by a recurring pattern of.
a) reduced economic conflict caused by the control of inflation. b) mortgage-backed securities with different risks. c) global savings gluts. d) political conflict sparked by large and persistent global imbalances. e) wide spread tax cuts. Answer: d
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21. The financial crisis of 2007-2009 acquired a global dimension a) because Asian financial institutions purchased mortgage-backed securities in large quantities. b) in spite of debt-service problems caused by leveraged buying. c) because of government budget deficit politics in advanced countries. d) because Great Britain, Ireland, and Spain experienced their own real estate bubble bursts. e) because European financial institutions purchased mortgage-backed securities in large quantities often with borrowed money. Answer: d 22. The U.S. government’s Toxic Asset Relief Program (TARP) in 2008 to purchase risky assets from the largest banks authorized more than a) $300 billion. b) $500 billion. c) $700 billion. d) $1.0 trillion. e) $2.0 trillion. Answer: c 23. Since the late 1970s, European governments have desired more stable intra-European exchange rates a) in spite of the fact that exchange-rate costs are relatively inexpensive for most EU countries. b) because the cost of floating in the EU is so high that European governments are more willing to sacrifice domestic autonomy. c) because European governments are less willing to sacrifice domestic autonomy. d) because EU governments were equally committed to fighting inflation. e) because EU governments were required to maintain balanced budgets. Answer: b 24. Under the EMS system, the burden of maintaining fixed exchange rates fell principally upon a) countries with high inflation. b) countries with low inflation. c) counties with budget surpluses. d) countries with low interest rates. e) countries with low tax rates. Answer: a
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25. Developments in the contemporary international monetary system are driven primarily by a) German fear of inflation. b) why all EU countries are not members of the euro zone. c) distributive conflict over who should bear the costs of adjustment. d) levels of the VAT tax. e) China’s emergence as a fundamentally important creditor country. Answer: c .
True-False Questions 1. Governments recently have found themselves in fundamentally different types of distributive conflicts than those that brought down the Bretton Woods system in the early 1970s. Answer: False 2. The 1970s had seen relatively small current-account imbalances in the major industrial countries generally adjust quickly. Answer: True 3. Capital flows from Japan and Germany financed the US current-account deficits in the 1980s. Answer: True 4. In a compact known as the Plaza Accord in 1985, Germany, Britain, France, Italy and the United States consented to intervene in the foreign exchange markets whenever it appeared that the market was pushing the dollar up. Answer: False 5. The conflict over who would adjust - the United States or Germany- sparked massive turbulence in global equity markets. Answer: True 6. The dollar’s resilience as the international monetary system’s primary reserve currency may have as much to do with the shortcomings of the existing alternatives as with the inherent strength of the dollar. Answer: True 7. For the first 10 years of monetary union, the Bundesbank’s ability to shape EMU institutions appeared not to have secured Germany’s interests.
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Answer: False 8. Financial institutions that held mortgage-backed securities in large amounts suffered large losses in the 2007-2009 real estate crisis. Answer: True 9. The EMS exchange rates were so small that European governments had no problem in sacrificing domestic autonomy to stabilize exchange rates. Answer: False 10. China’s emergence as a creditor country has placed an emerging market economy in the center of the international monetary system for the first time in its history Answer: True
Essay/Discussion Questions 1. Explain and discuss the divergent macroeconomic policies of the U.S., Japan and Germany in the 1980s. 2. Discuss the issues and countries involved in the Plaza and Louvre Accords in mid 1980s. Were they successful? 3. Discuss and analyze why foreign government holdings of American government debt increased by 2.5 trillion between 1999 and 2008. 4. Discuss and explain the evolution of current-account imbalances between 1996 and 2010. How were they different than similar problems in the 1980s? 5. Why did the U.S. international investment position stabilize after 2004 in spite of continued heavy borrowing? 6. Explain and discuss US Congressional contentions that China’s policy of pegging the renminbi to the dollar constituted an unfair trade practice. 7. Explain how the Bush Jr. administration attributed global imbalances to a “global savings glut”. What were the Chinese and European rebuttals?
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8. Explain how governments’ reluctance to alter macroeconomic policies facilitated the development of the financial weaknesses that ultimately sparked the great financial crisis of 2007–2009. 9. How did governments and central banks respond to prevent the total collapse of the world financial system in 2007-2009? 10. Explain why there has been more cooperation than conflict in EU’s exchange-rate system since the late 1970s. What are the prospects for the EMU?
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Chapter 12: A Society-Centered Approach to Monetary and Exchange-Rate Policies
Multiple Choice Questions 1. Between 2011 and 2017, the dollar rose in value against America’s largest trading partners by a) 10%. b) 15%. c) 20%. d) 25%. e) 30%. Answer: e 2. Governments in advanced industrial societies have consistently chosen domestic economic autonomy over exchange-rate stability only since the a) 1860s. b) 1880s. c) 1900s. d) 1920s. e) 1940s. Answer: d 3. Governmental attitudes toward economic management after WW I changed because a) electoral systems were more restrictive concerning minimum voting age after the war. b) electoral systems were more restrictive concerning minimum income or property conditions after the war. c) universal male suffrage had been adopted in all Western European countries by 1911. d) universal female suffrage had been adopted in all Western European countries by 1931. e) Interests of workers had been but excluded from the political process until after the war. Answer: e 4. In Great Britain until 1884, only a) 3.3% of the population could vote. b) 6.3% of the population could vote. c) 9.3% of the population could vote. d) 12.3% of the population could vote. e) 15.3% of the population could vote.
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Answer: a 5. The rise of worker power therefore created political incentives for governments to adopt economic policies that would raise employment and keep wages relatively high. Such policies a) were always consistent with a continued commitment to the gold standard. b)w ere not always consistent with a continued commitment to the gold standard. c) created political incentives to move away from the constraints of a floating exchange-rate. d) created political incentives to avoid the foreign costs of balance-of-payments adjustment. e) created political incentives to avoid the domestic costs of inflation. Answer: b 6.
Keynesian theories and policy recommendations focused primarily on the problem of a) unemployment. b) inflation. c) consumer prices. d) exports. e) fixed exchange rate systems. Answer: a
7. In the early 1920s, British unemployment rose to about a) 10%. b) 14%. c) 16%. d) 20%. e) 22%. Answer: d 8. According to Keynes, economies can get stuck at high levels of unemployment because of a) government budget deficits. b) uncertainty of investment decisions. c) adverse parliamentary regulations. d) exchange rate instability. e) cash hoarding. Answer: b 9. Investment expenditures typically account for about __________ of total national expenditures. a) 10% b) 20%
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c) 30% d) 40% e) 50% Answer: b 10. Because Keynes believed that the cause of persistent high unemployment ultimately lay in adequate demand for goods, he proposed that governments use fiscal and monetary policies to a) manage interest rates. b) manage aggregate demand. c) manage savings rates. d) manage budget deficits. e) manage imports. Answer: b 11. Which of the following is not a part of aggregate demand? Consumption and investment expenditures made by a) government. b) domestic customers. c) foreign consumers. d) domestic producers. e) foreign producers. Answer: e 12. The three society-based models of monetary and exchange rate politics are a) an institutional model, a partisan model, and a factor model. b) an organizational model, a partisan model, and a sectoral model. c)a n institutional model, a neutral model, and a sectoral model. d) an institutional model, a production model, and a sectoral model. e) an institutional model, a partisan model, and a sectoral model. Answer: e 13. The “Unholy Trinity” framework deals with three government policy goals: a) floating exchange rate, domestic autonomy of monetary policy, and capital mobility. b) fixed exchange rate, domestic autonomy of monetary policy, and labor mobility. c) fixed exchange rate, domestic autonomy of monetary policy, and capital mobility. d) fixed exchange rate, domestic autonomy of fiscal policy, and capital mobility. e) floating exchange rate, domestic autonomy of fiscal policy, and labor mobility.
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Answer: c 14. Which of the following statements is true? a) When capital is mobile, imbalances arise slowly after a change in monetary policy. b) When capital is immobile, imbalances arise rapidly after a change in monetary policy. c) When capital is mobile, imbalances are usually pretty small. d) When capital is immobile, imbalances are usually very large. e) When capital is immobile, imbalances are usually pretty small. Answer: e 15. The Philips curve is based on a tradeoff between a) inflation and unemployment. b) deflation and unemployment. c) inflation and budget deficit. d) unemployment and trade deficit. e) inflation and imports. Answer: a 16. According to the electoral model, prior to an election, politicians are more likely to adopt a) policies that fight inflation. b) policies that inhibit economic growth. c) policies that try to lower unemployment. d) policies that try to stabilize exchange rates. e) policies that devalue the currency. Answer: c 17. In constitutional democracies politicians must win approval of veto players to adjust macroeconomic policies to their benefit. Examples of veto players do not include a) opposition political parties. b) independent domestic government institutions. c) sub-national units with influence over economic policy. d) state governments in the United States. e) foreign government institutions. Answer: e 18. Which of the following reasons is a weakness of the explanation of exchange-rate policy changes according to the electoral approach?
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a) It tells us little about exchange-rate policy at other times other than election periods. b) Different political parties pursue distinct macroeconomic objectives. c) Right wing parties are typically less concerned about unemployment and more concerned about inflation. d) It does not assume that all governments value monetary autonomy more than exchange-rate stability. e) Exchange rate policy is determined by the group that has the greatest influence regardless of elections. Answer: a 19. Of the ten recessions that have occurred in the United States between 1946 and 2002, a) 4 of 10 have happened under Republican administrations. b) 5 of 10 have happened under Republican administrations. c) 6 of 10 have happened under Republican administrations. d) 7 of 10 have happened under Republican administrations. e) 8 of 10 have happened under Republican administrations. Answer: e 20. According to Oatley, some analysts argue that market expectations of prolonged dollar weakness could lead to higher interest rates in the United States. Higher interest rates would. a) lower the cost of investment for the private sector. b) lower the federal government’s borrowing costs. c) raise the federal government’s borrowing costs. d) eventually prevent foreign currency retaliation. e) could cause foreign governments keep the euro as their primary vehicle currency and reserve asset. Answer: c 21. According to Oatley, which of the following groups is not a domestic actor group according to the sectoral model? a) Import-competing producers b) Export-oriented producers c) Nontraded-goods producers d) Financial services industry e) Natural resources industry Answer: e 22. Which of the following statements is incorrect according to the sectoral model?
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a) Export-oriented producers prefer a fixed exchange rate. b) Import-competing producers prefer a floating exchange rate. c) Nontraded producers prefer a floating exchange rate. d) Financial services prefer a fixed exchange rate. e) Financial services prefer monetary-policy autonomy. Answer: d 23. Which of the following statements about the level of the exchange is correct according to the sectoral model? a) The export-oriented sector prefers a strong currency. b) The import-competing sector prefers a strong currency. c) The traded-goods sector prefers a strong currency. d) The nontraded goods sector prefers a weak currency. e) Financial services sector tend to be agnostic with respect to the level of exchange rates. Answer: e 24. Which of the following reasons is a weakness of the explanation of exchange-rate policy changes according to the sectoral model? a) The sectoral approach may underestimate the importance that export-oriented firms attach to exchange rate stability. b) The sectoral approach may overestimate the importance that the traded goods sector attaches to a strong currency. c) The sectoral model tells us little about exchange-rate policy outcomes. d) The sectoral approach may overestimate the importance that export-oriented firms attach to monetary-policy autonomy. e) The sectoral approach may underestimate the importance that the traded goods sector attaches to a weak currency. Answer: c 25. Which of the following criticisms of the society-centered approaches to exchange rate politics is not generally valid? a) They don’t explain outcomes. b) They omit the interests of noneconomic interest groups. c) They assume that governments do have independent preferences. d) They assume that policy outcomes result from decisions made by the party that controls government. e) They overstate the ability of domestic interest groups to influence policy. Answer: c
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True-False Questions 1. Between 2011 and 2017 when the dollar rose in value against America’ largest trading partners, American exporters found it increasingly easier to sell in foreign markets. Answer: False 2. To maintain a fixed exchange rate, a government does not have to surrender its ability to manage the domestic economy. Answer: False 3. By 1918, universal male suffrage had been adopted in all West European countries. Answer: False 4. Keynes argued that governments must accept persistent high employment until wages fell low enough for the demand for labor to increase. Answer: False 5. Keynes believed that the cause of persistent high unemployment ultimately lay in the inadequate demand for goods. Answer: True 6. Both the institutional and partisan models of monetary and exchange-rate politics assume that all governments want to retain monetary policy autonomy in order to manage the domestic economy. Answer: True 7. The sectoral model of monetary and exchange-rate politics assumes that all governments want to value monetary policy autonomy more than exchange-rate stability. Answer: False 8. The partisan model of monetary and exchange-rate politics is based on a trade-off between unemployment and inflation. Answer: True 9. A large body of research suggests that leftist and rightist governments in the advanced industrialized countries have not in fact pursued distinct macroeconomic policies throughout the post WW II era. Answer: False
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10. The strong dollar seemingly posed a threat to Trump’s campaign promise to reduce and even eliminate America’s trade deficit. Answer: True
Essay/Discussion Questions 1. Explain and discuss how electoral reform had a profound effect on exchange rate policies. 2. What was Keynes’ explanation for high levels of unemployment in the 1920s & 1930s? How did this challenge neoclassical theory at that time? 3. What is the Phillips curve? What tradeoffs does it explain? Give a contemporary example of this principle. 4. Briefly explain the similarities and differences between the three society-based models of monetary and exchange-rate politics. 5. Explain the concept of the “Unholy Trinity” as the trade-off between domestic economic autonomy and exchange-rate stability. 6. Describe and explain the electoral model of monetary and exchange-rate politics. 7. Describe and explain the partisan model of monetary and exchange-rate politics. 8. Compare and contrast the similarities of the sectoral model of monetary and exchangerate politics with the electoral and partisan models. 9. What are the weaknesses of each of the three society-based models of monetary and exchange-rate politics? 10. Explain the pros and cons of a weak versus a strong dollar in the contemporary international political economy.
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Chapter 13: A State-Centered Approach to Monetary and Exchange-Rate Policies Multiple Choice Questions 1. The natural rate of unemployment is the rate of unemployment a) to which an economy will return after a recession or a boom. b) which is determined by the country’s minimum wage. c) which could be zero. d) which cannot be raised by labor market institutions. e) which is determined by the rate of inflation. Answer: a 2. The accelerationist principle stipulates that a government determined to use monetary policy to keep a) employment below the natural rate for any lengthy period will have to continually increase the rate of inflation to do so. b) unemployment below the natural rate for any lengthy period will have to continually increase the rate of inflation to do so. c) unemployment below the natural rate for a short period will have to continually increase the rate of inflation to do so. d) unemployment below the natural rate for any short period will have to continually decrease the rate of inflation to do so. e) unemployment above the natural rate for any lengthy period will have to continually increase the rate of inflation to do so. Answer: b 3. During the period 1984-1994 in the United States, the rate of inflation was, on average, about a) 2.7%. b) 3.2%. c) 4.1%. d) 5.5%. e) 6.5%. Answer: e 4. According to Oatley, a) lower inflation during the 1970s did not reduce unemployment relative to the 1960s. b) higher inflation in the 1980s did not raise unemployment relative to the 1970s.
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c) higher inflation in the 1990s did not raise unemployment relative to the 1980s. d) lower inflation in the 1990s did not raise unemployment relative to the 1980s. e) higher inflation in the 1990s did raise unemployment relative to the 1980s. Answer: d 5. According to the data presented in the Oatley book, during the period 1964-1990 a) countries with relatively low inflation rates have experienced no economic growth. b) countries with relatively low inflation rates have experienced lower economic growth. c) countries with relatively high inflation rates have experienced higher economic growth. d) if we exclude Germany, the negative relationship between inflation and economic growth disappears. e) if we exclude Japan, the negative relationship between inflation and economic growth disappears. Answer: e 6. According to Figure 13.1, for 1964-1970 for the six countries listed, if we add the inflation rate to the unemployment rate (lowest is best), the country with the lowest score is a) the United States. b) Italy c) France. d) Britain. e) Japan. Answer: b 7. According to the data presented in the Oatley book, there is a) no evidence that countries with higher inflation experienced stronger economic growth or lower unemployment. b) some evidence that countries with higher inflation experienced stronger economic growth or lower unemployment. c) no evidence that countries with higher inflation experienced weaker economic growth or lower unemployment. d) no evidence that countries with lower inflation experienced weaker economic growth or higher unemployment. e) some evidence that countries with lower inflation experienced weaker economic growth or higher unemployment. Answer: a
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8. The price stability strategy during the 1980s a) was a reaffirmation of Keynesian principles. b) asserts that the only proper objective of monetary policy was to achieve and maintain a very low and stable rate of inflation. c) asserts that the only proper objective of monetary policy was to achieve and maintain a very high but stable rate of inflation. d) asserts that the only proper objective of monetary policy was to achieve and maintain a very low even if unstable rate of inflation. e) occurred first in Switzerland. Answer: b 9. The shift from Keynesian strategies to the pursuit of price stability occurred first in a) the United States. b) Germany. c) Britain. d) France. e) Japan. Answer: c 10. A time-consistency problem arises when a) the best course of action at a particular moment in time differs from the best course of action in general. b) the best course of action at the beginning is usually the best course of action in general. c) the best course of action at the end is usually the best course of action in general. d) there is no way of knowing what the best course of action is in general. e) the best course of action at a particular moment in time is the same as the best course of action in general. Answer: a 11. According to Oatley, a) neither inflation or unemployment will be higher than it would be if the government could make a credible commitment to low inflation. b) either inflation or unemployment will be higher than it would be if the government could make a credible commitment to low inflation. c) unemployment will be lower than it would be if the government could make a credible commitment to low inflation. d) inflation will be higher than it would be if the government could make a credible commitment to low unemployment.
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e)e ither inflation or unemployment will be lower than it would be if the government could make a credible commitment to low inflation. Answer: b 12. According to Oatley, a factor that reduces the inconsistency between democracy and independent central banks is that a) legislatures cannot withdraw the independence of central banks. b) central bankers are typically appointed by elected officials for limited terms of office. c) they are not the only political institutions that are granted independence from electoral politics in democracies. d) monetary policy is a rather minor policy instrument at a government’s disposal. e) the economic benefit is overwhelming more important than the political inconvenience. Answer: b 13. Which of the following statements is not a function of central bank independence? a) The central bank can set monetary policy free from the interference by the government. b) The central bank is free to decide what economic objective to pursue. c) The central bank is free to decide how to set monetary policy in pursuit of the objective. d) Central bank decisions can be reversed by other branches of the government. e) Central bank decisions cannot be reversed by other branches of the government. Answer: d 14. According to Oatley, a good example of a highly independent central bank (1969-1995) is a) the Reserve Bank of Australia. b) the Bank of France. c) the Swiss National Bank. d) the Bank of Japan. e) the Bank of Britain. Answer: c 15. According to Oatley, granting the central bank independence should lead to a) lower inflation than governments have. b) lower unemployment than governments have. c) unstable political consequences. d) higher economic growth than governments have.
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e) higher unemployment than governments have. Answer: a 16. According to Oatley’s data in chapter 13, which plots data for 1969-1995, the country with the lowest inflation rate and the most central bank independence was a) Japan. b) Germany. c) Britain. d) France. e) United States. Answer: b 17. The EU’s central bank, the ECB, was established in ________and is one of the world’s most independent central banks. a) 1999. b) 1985. c) 2001. d) 1997. e) 2002. Answer: a 18. According to the IMF, the global economy shrank by ________in 2020, a) 1.9 percent. b) 3.1 percent. c) 3.5 percent. d) 2.9 percent. e) 3.9 percent. Answer: b 19. According to the data in the Oatley book, which of the following statement is true? a) There is overwhelming evidence that countries with more independent central banks have experienced lower rates of inflation. b) There is no evidence that countries with more independent central banks have experienced lower rates of economic growth. c) There is no evidence that countries with more independent central banks have experienced lower rates unemployment. d) There is strong evidence that independent central banks have been better able to deliver low inflation than governments have. e) There is strong evidence that governments have been better able to deliver low inflation than independent central banks have.
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Answer: d 20. In spring 2020, for instance, the US passed The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) for income replacement programs. The CARES Act was the largest stimulus bill in American history, amounting to 10 percent of GDP. a) 9 percent of GDP. b)1 1 percent of GDP. c) 10 percent of GDP. d) 8.5 percent of GDP. e)1 2 percent of GDP. Answer: c 21. By 2021, the world economy had resumed growth and unemployment had stabilized, but was beginning to experience an uptick in inflation. In the US, prices rose by more than a) 10 percent in 2021. b)9 percent in 2021. c)8 percent in 2021. d) 7 percent in 2021. e) 6 percent in 2021. Answer: d 22. In the US, government debt rose by, _________, the largest increase since World War II. a) $3.1 trillion and $2.8 trillion in 2020 and 2021 b) $3.2 trillion and $2.9 trillion in 2020 and 2021. c) $3.3 trillion and $2.6 trillion in 2020 and 2021. d) $3.4 trillion and $2.7 trillion in 2020 and 2021. e) $3.5 trillion and $2.5 trillion in 2020 and 2021. Answer: a 23. Although the Treasury takes the lead in U.S. exchange-rate policy, it has consistently a) sought cooperation with the Federal Reserve. b) remained independent with the Federal Reserve. c) been dependent on the Federal Reserve. d) been consistent by the European Central Bank. e)s ought cooperation with the Federal Trade Commission. Answer: a
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24. The sectoral model leads us to expect firms in the traded-goods industries to pressure the government for some form of exchange-rate arrangement a) because they benefit from a unstable currency. b) because they benefit from an independent ECB. c) because they benefit from a weak ECB. d) because they benefit from a strong currency. e) because they benefit from a weak currency. Answer: e 25. The two principal criticisms of the state-centered approach to monetary politics are a) it is more prescriptive than explanatory and it does not answer what incentives for currency strength exist for the people who run independent central banks. b) it is more explanatory than prescriptive and it does not answer what incentives for price stability exist for the people who run independent central banks. c) it is more prescriptive than explanatory and it does not answer what biases against labor exist for the people who run independent central banks. d) it is more prescriptive than explanatory and it does not answer what incentives for price stability exist for the people who run independent central banks. e) it is more prescriptive than explanatory and it does not answer what biases for capital savers exist for the people who run independent central banks. Answer: d
True-False Questions 1. Contemporary economic theory asserts that no Keynesian stable trade-off between inflation and unemployment exists. Answer: True 2. Contemporary economic theory argues that a government cannot use monetary policy to move unemployment below or above the natural rate of unemployment for more than a short time. Answer: True 3. Governments can easily make credible commitments to low inflation if they want to because of the time-consistency paradox. Answer: False 4. A government determined to use monetary policy to keep unemployment below the natural rate for any lengthy period will have to continually increase the rate of inflation to do so. (This is called the accelerationist principle.)
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Answer: True 5. Although independent central banks appear to reduce inflation, there is no evidence that they may also be associated with lower growth and higher unemployment. Answer: False 6. By the middle of 2020, the US economy had shrunk by nine percent compared to one year earlier and unemployment had reached almost 15 percent. Answer: True 7. According to the IMF, “At the onset of the pandemic, policymakers around the world were synchronized in dramatically easing monetary policy and expanding fiscal policy.” Answer: True 8. Since national governments have relinquished control over monetary policy to independent central banks, they have not retained control over exchange-rate policy. Answer: False 9. Conflicts are not likely to arise when the central bank wants the exchange rate to move in one direction in order to maintain price stability, but the government wants the exchange rate to move in the other direction to satisfy demands made by important interest groups. Answer: False 10. Little attention has been devoted to the question of whether the people who run the independent central bank actually have an incentive to give priority to price stability. Answer: True
Essay/Discussion Questions 1. Explain and discuss how the Keynesian policy revolution came to an end as a result of prolonged inflation in the 1970s and 1980s. 2. Discuss the logic and the evidence that all countries do, in fact, have a natural rate of unemployment. How long is it reasonable to wait after a recession or a boom for this long-run equilibrium to appear? 3. Explain the dynamic and concept of the accelerationist principle in the context of the United States between 1961 and 1999. How unique was the American experience?
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4. How strong is the negative relationship between inflation and unemployment? Give some examples to justify your claim. 5. What is meant by the time-consistency problem and how does it affect a government’s commitment to low inflation? 6. Explain how and why during the pandemic governments across the advanced economies eased fiscal and monetary policy to cushion the initial shock and promote recovery. 7. Are independent central banks compatible with democratic principles? 8. Discuss whether and why the behavior of equally independent central banks can substantially differ in both behavior and policy. 9. Discuss and predict why future politics of monetary and exchange rate policies between elected officials and central banks will be more or less conflictual. 10. Describe and analyze the state-centered approach to monetary and exchange-rate politics.
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Chapter 14: Developing Countries and International Finance I: The Latin American Debt Crisis Multiple Choice Questions 1. According to research cited by Oatley, many studies have found that one dollar of additional foreign capital in a developing country produces additional investment of a) fifty cents. b) seventy-five cents. c) one dollar. d) two dollars. e) three dollars. Answer: c 2. In 2020, the advanced industrial countries together provided bilateral assistance to developing countries in the amount of a) $33 billion. b) $63 billion. c) $101 billion. d) $114 billion. e) $163 billion. Answer: d 3. In 2020, the World Bank and other multilateral development agencies provided an additional development assistance of a) $57 billion. b) $47 billion. c) $71 billion. d) $81 billion. e) $91 billion. Answer: b 4. Of the following countries, which is the least generous in providing foreign aid as a percentage of its national income? a) United States b) Japan c) Germany d) France e) United Kingdom
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Answer: a 5. In general, private capital typically constitutes somewhere between a) one tenth and one quarter of all capital flows to the developing world. b) one quarter and one third of all capital flows to the developing world. c) one third and one half of all capital flows to the developing world. d) one half and two thirds of all capital flows to the developing world. e) two thirds and three quarters of all capital flows to the developing world. Answer: e 6. The World Bank estimates that total remittances rose from less than $50 billion in 1990 to almost a) $442 billion by 2021. b) $556 billion by 2021. c) $615 billion by 2021. d) $702 billion by 2021. e) $810 billion by 2021. Answer: d 7. In the 1950s and 1960s the principal sources of foreign capital for developing countries were a) FDI and foreign aid and neither was abundant. b) SWF and foreign aid and neither was abundant. c) FDI which was abundant and foreign aid which was not. d) foreign aid which was abundant and FDI which was not. e) FDI and foreign aid and both were abundant. Answer: a 8. Between 1956 and 1970, the amount of aid provided through multilateral development agencies increased a) by 50%. b) by 150%. c) by 250%. d) by 400%. e) by 500%. Answer: d 9. The expansion of foreign aid programs during the 1960s reflected changing attitudes in advanced industrial countries as largely a product of the dynamics of a) globalization.
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b) decolonialization. c) commonwealth. d) free trade. e) sovereign wealth funds. Answer: b 10. As a result of the oil price increases and other factors, budget deficits in Latin America by the end of the 1970s on average were about a) 4.5% of GDP. b) 5.4% of GDP. c) 6.7% of GDP. d) 7.4% of GDP. e) 9.4% of GDP. Answer: c 11. Between 1970 and 1980, the developing world debt as a whole to foreign lenders went from a) $172.7 billion to $856.7 billion. b) $72.7 billion to $586.7 billion. c) $27.7 billion to $186.7 billion. d) $172.7 billion to $686.7 billion. e) $72.7 billion to $436.7 billion. Answer: b 12. The foreign debt of the seven most heavily indebted Latin American countries between 1970 and 1982 increased by a factor of a) five. b) seven. c) ten. d) twelve. e) fifteen. Answer: c 13. In the late 1970s and early 1980s, Latin American countries were vulnerable to a) rising debt service ratios. b) lower interest rates. c) lower migrant remittances. d) higher export revenues. e) lower export revenues. Answer: a
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14. According to Oatley, abrupt cessation of commercial bank lending in Latin America in the early 1980s, a) allowed many debtor countries to finance large current account deficits. b) no longer allowed governments to pay for increased energy exports. c) allowed governments to invest more than they could have otherwise. d) ended the economic boom of the 1970s abruptly. e) relaxed many of the constraints that had characterized the foreign-aid dominated system of the 1950s and 1960s. Answer: d 15. By 1982, the thirty most heavily indebted developing countries owed more than $600 billion to foreign lenders. Creditors initially diagnosed the debt crisis as a a) long-term liquidity problem. b) medium-term liquidity problem. c) short-term liquidity problem. d) failure of ISI trade policies. e) medium-term energy related problem. Answer: c 16. The center piece of macroeconomic stabilization program intended to eliminate the large current-account deficits was the reduction of a) capital outflows. b) unemployment. c) exports. d) budget deficits. e) MNC profits. Answer: d 17. In the 1980s many developing countries were allowed to reschedule their existing debt payments. These rescheduling agreements a) forgave some debt. b) reduced interest payments on the debt. c) reduced interest rates on the debt. d) required prior approval by the IMF on the content of the stabilization package. e) reduced the number of years allowed for repayment of the debt. Answer: d 18. IMF conditionality agreements have long been a source of controversy. Which of the following statements is not criticism of these agreements?
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a) These agreements reduce economic growth. b) These agreements raise unemployment. c) These agreements are inappropriately “one size fits all”. d) These agreements push vulnerable segments of society deeper into poverty. e) These agreements make private foreign lenders more unwilling to invest. Answer: e 19. Creditors were able to push such a large share of the adjustment costs onto the debtor governments because a) debtor governments were better at maintaining a common front. b) creditors were better able to solve the free rider problem better than debtors. c) smaller banks had lent less of their capital. d) larger banks could charge their losses to taxpayers in advanced industrial countries. e) the IMF threatened to make it difficult for the smaller banks to operate in the interbank market. Answer: b 20. According to Oatley, governments in debtor countries never threatened collective default primarily because a) creditors would offer “special deals” to induce particular governments not to join a default coalition. b) they were afraid of future IMF retaliation. c) they knew it would destroy their credit rating. d) they knew all debt would still have to be repaid in the long run. e) they feared invasion by advanced industrial countries to seize their resources like they did in the 1920s and 1930s. Answer: a 21. During the 1980s, the most accurate estimate of Argentina’s average inflation rate per year was over a) 150%. b) 300%. c) 500%. d) 700%. e) 900%. Answer: d 22. According to Oatley, which of the following was not a reason that induced developing governments to embark on economic reform in the 1990s?
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a) Altered power of previously favored interest groups b) The Brady Plan c) Long-run costs would be offset by short-term gains d) Latin American recognition of the East Asian model’s successes e) Commercial banks would be the primary beneficiary of reform Answer: c 23. The Brady Plan debtor governments could convert a) existing commercial bank debt into bond-based debt with a lower face value. b)e xisting foreign bank debt into bond-based debt with a lower face value. c)e xisting commercial bank debt into bond-based debt with a higher face value. d)e xisting bond-based bank debt into commercial bank debt with a lower face value. e)e xisting bond-based bank debt into commercial bank debt with a higher face value. Answer: a 24. The Latin American debt crisis was declared over in the mid-1990s. According to Oatley, in hindsight, it is clear that a) it was more of a financial crisis than an economic development one. b) it was more of an economic development crisis than a financial one. c) structural adjustment policies of the IMF pushed most of the costs onto the foreign commercial banks. d) more generous foreign aid would have prevented the crisis. e) reforms did not provoke enough changes in Latin American political and economic systems. Answer: b 25. The Latin American debt crisis also forced governments in the advanced industrialized world to establish a) a regional regime to manage the crisis. b) an international regime to manage trade. c) an international regime to manage the crisis. d) a remittance regime to manage the crisis. e) a foreign aid regime to manage the crisis. Answer: c True-False Questions 1. At the center of the difficult relationship between developing countries and the international financial system is a seemingly inexorable boom-and-bust cycle.
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Answer: True 2. Developing countries continue to draw on foreign capital because they do not understand that the political dangers outweigh the economic benefits. Answer: False 3. Throughout the postwar period, private capital flows have been larger than foreign aid flows. Answer: True 4. Foreign aid by China is about the same as to other regions in the developing world. Answer: False 5. Political instability is one of the most important reasons why sub-Saharan Africa attracts so little private capital. Answer: True : s: 6. Developing societies import foreign capital because it makes it possible to finance more investment at a lower cost than relying solely on their domestic savings. Answer: True 7. The Cold War did not contribute to the tremendous growth of foreign aid programs during the 1960s. Answer: False 8. Rising American interest rates in the early 1980s were transferred directly to Latin America because two-thirds of Latin American debt carried variable interest rates. Answer: True 9. Structural adjustment programs were controversial because they sought to reshape the indebted economies by increasing the government’s role and reducing that of the market. Answer: False 10. The Brady Plan strengthened the incentive to embark on reform by increasing the domestic benefits of reform. Large debt burdens reduced the incentive to adopt structural reforms because a significant share of the gains from reform would be dedicated to debt service. Answer: True
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Essay/Discussion Questions 1. Explain and discuss how each phase of the boom-and-bust cycle has characterized the history of capital flows from the advanced industrial countries to the developing world. 2. Why do developing countries continue to draw on foreign capital in spite of its apparent political dangers? 3. Why has sub-Saharan Africa failed to attract so little private capital and subsequently had to rely more on foreign aid than other developing regions? 4. Explain how and why the expansion of foreign aid programs in the 1960s was influenced by decolonialization and American desires to contain Soviet Communism. 5. Describe and explain why and how debt service ratios rendered Latin American countries vulnerable to international economic shocks in the 1980s. 6. Explain the process and the consequences of weighted voting in the Executive Board of the IMF. Why has the managing director usually been a nonAmerican? 7. Explain the rationale and consequences of structural adjustment programs on the economic crisis for Latin America in the early 1980s. 8. What are the pros and cons of IMF conditionality to the funds it extends to developing countries? 9. Explain how and why Latin America governments began to make painful economic adjustments in the late 1980s. 10. Explain how and why the Latin American debt crisis illustrates the tragic cycle at the center of North-South financial relations.
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Chapter 15: Developing Countries and International Finance II: The Global Capital Flow Cycle Multiple Choice Questions 1. Asia was the largest recipient of capital inflows, accounting for almost _____ of total flows to all developing countries in the first half of the 1990s. a) 10% b) 30% c) 50% d) 70% e) 90% Answer: c 2. According to Oatley, historical evidence suggests that more volatile capital flows have been associated with a) higher economic growth rates over the short run. b) higher economic growth rates over the long run. c) lower economic growth rates over the long run. d) lower economic growth rates over the short run. e) boom- and-bust growth rates over the long run. Answer: c 3. “Hot money” refers to a) bond and derivative funds. b) private capital that can be withdrawn at the first hint of trouble. c) public capital that cannot be easily withdrawn. d) money obtained through drugs and illegal activities. e) money hidden in secret foreign bank accounts. Answer: b 4. Financial crises became all too common during the 1990s. Each crisis was distinctive but shared the similarities that they a) involved some form of fixed exchange rate and a heavily reliance on short-term foreign capital. b) involved some form of floating exchange rate and a heavily reliance on shortterm foreign capital. c) involved some form of fixed exchange rate and a heavily reliance on long-term foreign capital. d) involved some form of floating exchange rate and a heavily reliance on long-term foreign capital.
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e) involved foreign investors losing confidence in governmental commitment to exchange rate stability and less reliance on short-term foreign capital. Answer: a 5. “Moral hazard” in the field of international political economy is when a) banks have an incentive to make safer loans than they would make in the absence of a guarantee of a government bailout. b) banks charge higher interest rates to high-risk borrowers. c) the practice of lending heavily to high-risk borrowers makes a systemic financial crisis more destructive. d) financial institutions have close ties to governments, sometimes through personal relationships. e) banks believe that the government will bail them out if they suffer large losses on the loans they have made. Answer: e 6. Weaknesses in the Asian financial systems in the late 1990s was caused by a) appreciating currencies and popping real estate bubbles. b) depreciating currencies and popping real estate bubbles. c) appreciating currencies and real estate booms. d) international debt-service difficulties began to generate domestic debt-servicing difficulties. e) foreign banks, which had loaned heavily to Asian banks, agreeing to continue to roll over existing loans. Answer: a 7. During the Asian financial crisis in 1997-1998, the IMF granted South Korea, Indonesia, Thailand and Malaysia a) $ 17 billion. b) $ 57 billion. c) $ 77 billion. d) $ 117 billion. e) $ 157 billion. Answer: d 8. Which of the following conditionality agreements was not required by the IMF as part of the assistance packages in 1997-98? a) Tightening of monetary policy to stem depreciation b) Regulation of agricultural enterprises c) Elimination of domestic monopolies
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d) Privatization of state-owned enterprises e) Trade liberalization Answer: b 9. A panicked withdrawal of funds from Asian markets in the summer of 1997 was due to a) deteriorating conditions in Asian financial systems and political instability. b)i ncreasing Chinese dominance in Asian financial systems c)i ncreasing Japanese dominance in Asian financial systems. d) deteriorating conditions in Asian financial systems and shifting international market sentiment. e) deteriorating conditions in Asian exchange markets. Answer: d
10. East Asian governments drew one overarching lesson from the crisis and crisis management – a) do not let the economy become vulnerable to IMF intervention. b) IMF conditions reflected Japanese interests. c) IMF conditions reflected Chinese interests. d) IMF conditions reflected American interests. e) IMF discipline was necessary to control political corruption. Answer: a 11. East Asian governments as a group accumulated more than half of global reserve holdings by then end of 2009. The country with the largest stock of foreign exchange reserves was a) Japan with $1.4 trillion. b) Indonesia with $1.4 trillion. c) S. Korea with $1.4 trillion. d) China with $2.4 trillion. e) China with $4.4 trillion. Answer: d 12. East Asian economies have been able to run persistent current account surpluses because their governments a) pegged their currencies to the dollar at overvalued exchange rates and engaged in sterilized money supply intervention. b) pegged their currencies to the dollar at competitive exchange rates and let their money supply increase to match current account surpluses. c) pegged their currencies to the dollar at competitive exchange rates and decrease their money supply.
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d) pegged their currencies to the yen at undervalued exchange rates and engaged in currency speculation. e) pegged their currencies to the renminbi at competitive exchange rates and engaged in sterilized intervention. Answer: c 13. At the end of May 2010, China owned a) 25 percent of total foreign-owned U.S. debt. b) 24 percent of total foreign-owned U.S. debt. c) 23 percent of total foreign-owned U.S. debt. d) 22 percent of total foreign-owned U.S. debt. e) 21 percent of total foreign-owned U.S. debt. Answer: d 14. East Asian governments peg to the dollar because a) the United States is the largest economy in the world. b) the United States is their most important trade partner. c) the dollar is the international reserve currency. d) the dollar is undervalued. e) the dollar is overvalued. Answer: b 15. The system that resulted from the arrangements that came from the IMF intervention in the East Asian financial crisis in the late 1990s has come to be called “Bretton Woods II” because a) US trade surpluses currently drive growth in East Asia, just as they drove early postwar growth in Europe. b) the system is stable as long as East Asian countries are willing to accumulate US government securities like Europeans did with U.S. gold. c) US trade deficit drives growth in East Asia, and floating exchange rate stabilize the value of the dollar. d) the system is stable as long as East Asian countries are willing to accumulate US gold like Europeans did. e) the system is still based on fixed exchange rates and IMF interventions. Answer: b 16. The Chiang Mai Initiative was a regional body a) proposed by the Chinese as a kind of Asian Monetary Fund. b) that was enthusiastically endorsed by East Asian governments. c) proposed by the US but failed to attract support from China.
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d) was rejected by the Japanese who were wary of American ambitions. e) proposed by the Japanese as a kind of Asian Monetary Fund. Answer: e 17. According to Oatley, Bretton Woods II arguably played a key role in the development of the global financial crisis of 2008-2009 because a) the demand for US government debt instruments drove up interest rates. b) high interest rates burst the real estate bubbles in US and Europe. c) the demand for US government debt instruments drove down interest rates. d) low interest rates drove down the values of commercial real estate in US and Europe. e) it undermined the Asian savings glut and US economic sovereignty. Answer: c 18. Most of the debt of the world’s poorest countries is owed to a) official lenders like IMF & World Bank. b) resource-exporting MNCs. c) East Asian governments. d) East Asian export companies. e) oil exporting governments. Answer: a 19. The results from the initial debt-reduction programs were disappointing. Debt-service burdens actually increased for the poorest countries in spite of reducing foreign debt by around a) $10 billion. b) $30 billion. c) $60 billion. d) $90 billion. e) $150 billion. Answer: c 20. Eligibility for the HIPC initiative was launched in 1996 with the goal to reduce foreign debt to sustainable levels. The IMF and World Bank estimated that the typical country that completed the program would see a) its debt reduced by one quarter and its debt-service ratio cut by one third. b) its debt reduced by one half and its debt-service ratio cut in half. c) its debt reduced by one third and its debt-service ratio cut by one third. d) its debt reduced by two thirds and its debt-service ratio cut in half. e) its debt reduced by three quarters and its debt-service ratio cut by two thirds.
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Answer: d 21. Asset prices began to rise rapidly in emerging market countries from 2011, generating a) fears of an emerging market housing bubble. b) hopes of a lower debt service. c) fears of political instability. d) fears of IMF interference. e) fears of rising wages. Answer: a 22. East Asian societies saved as much as ___________, and used an important share of these funds to purchase U.S. government securities. a) 50 percent of their income after 1999 b) 40 percent of their income after 1999 c) 50 percent of their income after 1997 d) 45 percent of their income after 1997 e) 40 percent of their income after 1996 Answer: c 23. The most distinctive aspect of the most recent Asian manifestation of the capital flow cycle is that a) a systemic banking but not sovereign debt crises have materialized. b) both systemic banking and sovereign debt crises have materialized. c)a systemic banking, sovereign debt crisis and political instability have materialized. d) not a systemic banking but sovereign debt crises have materialized. e) neither a systemic banking nor a sovereign debt crisis have materialized. Answer: e 24. The volume and composition of capital flows from the advanced industrialized countries and the developing world have been shaped in large part by a) only changes in American monetary policy. b)c hanges in international financial markets and changes in American monetary policy. c) changes in international financial markets but not in American monetary policy. d) neither changes in international financial markets nor changes in American monetary policy. e) changes in the IMF and the World Bank. Answer: b
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25. International financial integration over the last 20 years has greatly expanded developing countries’ opportunities a) for attracting foreign capital. b) for restricting national capital c) for decreasing debt-service ratios d) for subsidizing agricultural exports e) for suppressing domestic dissent Answer: a
True:-False: Questions 1. The suggestion that developing countries should reintroduce controls to limit the volume of private capital flows ultimately carried the day. Answer: False: 2. Historical evidence suggests that more volatile capital flows have not been associated with lower economic growth rates over the long run. Answer: False: 3. Heavy dependence on short-term capital required the continual rollover of foreign liabilities. Answer: True: 4. The Asian financial crisis of 1997 originated in political and economic dynamics in Thailand, Indonesia, South Korea and Singapore. Answer: False: 5. The same network of business-government relations in Asia that created the moral hazard problem in the first place also weakened the incentives that governments had to develop and enforce effective prudential regulations. Answer: True: 6. In Indonesia, the economic crisis sparked large-scale opposition to corruption, nepotism, and cronyism that forced Suharto out of office. Answer: True: 7. The ability for the United States to run deficits does depend, in part, on the continued willingness of the Chinese government to acquire and hold U.S. government debt. Answer: True:
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8. Bretton Woods II arguably did not play a key role in the development of the global financial crisis of 2008-2009.
Answer: False: 9. The tempers of many emerging market policymakers flared again as the Federal Reserve began to shift away from quantitative easing in the middle of 2013. Answer: True: 10. Domestic politics influence how much foreign debt is accumulated and the uses to which it is put. Answer: True:
Essay/Discussion Questions 1. Explain and discuss suggestions for change of the debt management regime established in the 1980s in the wake of the financial crises of the 1990s. Which of these ideas was ultimately adopted? 2. Explain how policies toward private capital flows to developing countries were radically different in the 1990s. How did these changes combine to alter the composition, as well as the scale, of private capital flows to the developing world? 3. Explain how the problem of “moral hazard” made it especially difficult for Asian banks to intermediate safely between international and domestic financial markets. 4. IMF assistance in the Asian financial crisis of the 1990s was conditional upon economic reform. What were these reforms and how did they affect Thailand and Indonesia differently? 5. Explain and discuss Bretton Woods II. How was it comparable to the original Bretton Woods system? 6. Discuss the pros and cons of China’s status as a large lender to the United States. How could China’s creditor position make it difficult to defend American interests in Asia?
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7. Explain how the roots of the 2008-2009 global financial crises lie in East Asia’s governments’ responses to the 1997 crisis. 8. Discuss and analyze why global policymakers, investment banks, and media outlets were becoming increasingly concerned about the financial health of five emerging market economies—India, Brazil, Turkey, South Africa, and Indonesia. What were the consequences of these concerns? 9. Explain the conditions under which the HIPC initiative developed and changed in response to the debt reduction challenges of the world’s poorest countries. Does debt cancellation encourage moral hazard dilemmas by both lenders and governments? 10. Discuss why for the developing world as a whole, the early 2000s were a period of financial stability.
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Chapter 16: The Achievements of and Challenge to the Global Capitalist Economy
Multiple Choice Questions 1. According to Oatley, what binds the anti-globalization movement is opposition to a global economy that they believe prioritizes a) advanced industrial country interests over developing country interests. b) Asian economic development over other developing regions. c) economic interests over security concerns. d) corporate and commercial interests over other concerns. e) political interests over economic interests. Answer: d 2. According to Oatley, globalization is challenged from within by neo-populist movements that are stridently. a) anti-trade, anti-immigrant, racist, anti-elite, and nationalist. b) pro-trade, anti-immigrant, racist, pro-elite, and nationalist. c) anti-trade, anti-immigrant, anti-racist, anti-elite, and internationalist. d) anti-trade, pro-immigrant, racist, anti-elite, and nationalist. e) anti-trade, pro-immigrant, anti-elite, and socialist. Answer: a 3. Soviet-style Marxism-Leninism persisted on into the postwar era, it too largely ceased to offer an appealing alternative model and a) had disappeared entirely by 1970. b) had disappeared entirely by 1975. c) had disappeared entirely by 1980. d) had disappeared entirely by 1985. e) had disappeared entirely by 1990. Answer: e 4. According to World Bank data, global per capita income increased by an additional 86 percent since 2000, a) reaching more than $10,000 by 2010. b) reaching more than $10,000 by 2017.
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c) reaching more than $15,000 by 2017. d) reaching a little less than $9,000 by 2017. e) reaching a little less than $8,500 by 2017. Answer: b 5. Recent research suggests that the pandemic increased the percentage of the population living in extreme poverty increasing to
a) 9.0 percent in 2020 and 8.8 percent in 2021. b) 9.1 percent in 2020 and 8.9 percent in 2021 c) 9.2 percent in 2020 and 9.0 percent in 2021 d) 9.4 percent in 2020 and 9.2 percent in 2021 e) 9.9 percent in 2020 and 9.6 percent in 2021. Answer: d 6. The post-World War II era has been characterized by decolonization such that by a) 2000 nobody lived under colonial rule. b) 1990 nobody lived under colonial rule. c) 1980 nobody lived under colonial rule. d) 1970 nobody lived under colonial rule. e) 1960 nobody lived under colonial rule. Answer: b 7. The average person lives twice as long today as she did in 1913 and a) 50 percent longer than she did in 1940. b) 50 percent longer than she did in 1945. c) 50 percent longer than she did in 1950. d) 50 percent longer than she did in 1955. e) 50 percent longer than she did in 1960 Answer: c 8. In the United States in 2019, for instance, people in the top 1 percent of the income distribution earned on average roughly $1.4 million; in contrast, but the people in the bottom 90 percent of the income distribution earned, on average, a) approximately $22,000. b)a pproximately $25,000. c)a pproximately $30,000. d)a pproximately $33,000. e)a pproximately $35,000. Answer: e 9.
The potential benefits that science has generated have had a
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a) similar impact in societies that participated in the global capitalist economy than in those societies that stood outside this system. b) greater impact in societies that participated in the global capitalist economy than in those societies that stood outside this system. c) lesser impact in societies that participated in the global capitalist economy than in those societies that stood outside this system. d) greater impact in societies that did not participate in the global capitalist economy than in those societies that stood outside this system. e) greater impact in societies that participated in the global capitalist economy than in those societies that stood for nationalism. Answer: b 10. Although global per capita incomes have increases and income inequality globally has fallen, a) wealth and income have also become increasingly equal within many societies. b) wealth and income have also become increasingly unequal within many societies. c) wealth and income have also become increasingly equal within advanced industrial societies. d) wealth and income have also become increasingly equal within developing societies. e) wealth but not income have also become increasingly unequal within many societies. Answer: b 11. The Stolper-Samuelson Theorem tells us that in the American economy we would expect free trade to a) increase the return to physical and human capital and reduce the return to labor. b) increase the return to labor and reduce the return to physical and human capital. c) increase the return to physical and human capital and maintain the return to labor. d) lower the return to physical and human capital and reduce the return to labor. e) increase the return to physical and human capital and labor. Answer: a 12. “Skill biased technological change”, is a process wherein a) technology substitutes for medium-skill workers. b) technology substitutes for high workers. c) technology substitutes for agricultural workers.
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d) technology substitutes for urban workers. e) technology substitutes for low-skill workers. Answer: e 13. Peter Temin has recently argued that the US economy has evolved into a dual economy which is: a) one high-wage economy and one low-wage economy and many connections between them. b) one high-wage economy and one low-wage economy and very few connections between them. c) one high-wage economy and one medium-wage economy and very few connections between them. d) one medium-wage economy and one low-wage economy and very few connections between them. e) one high-wage economy and one low-wage economy and very few international connections between them. Answer: b 14. The 2008-2009 financial crisis and the policy response a) imposed new burdens on the segment of society that were the least exposed to the downsides of globalization. b) imposed new advantages on the segment of society that were already most exposed to the downsides of globalization. c) imposed new burdens on the segment of society that were already most exposed to the advantages of globalization. d) imposed new burdens on the segment of society that were already most exposed to the downsides of globalization. e) imposed new advantages on the segment of society that were already benefiting exposed to the benefits of globalization. Answer: d 15. As a political movement, right-wing populism favors policies and programs that are culturally conservative, anti-globalization, anti-immigration, and often antienvironmentalist, including climate change skepticism. defines the elite as corrupt and often too responsive to foreign or cosmopolitan interests and concerns a) culturally conservative. b) anti-globalization. c) anti-immigration. d) are climate change skeptical. e) defines the elite as nationalist.
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Answer: e
16. Rodrik’s “Political Trilemma” suggests that governments face three desirable objectives: a) globalization, democratic decision making, and national interdependence. b) regionalism, democratic decision making, and national autonomy. c) globalization, democratic decision making, and national autonomy. d) globalization, populist decision making, and nationalism. e) mercantilism, democratic decision making, and national autonomy. Answer: c 17. The Bretton Woods compromise that states crafted after World War II a) combined globalization and democratic decision making but sacrificed national political autonomy. b) combined national political autonomy and globalization but sacrificed democratic decision making. c) established national political autonomy but sacrificed globalization and democratic decision making d) combined national political autonomy and democratic decision making but sacrificed globalization. e) established national political autonomy, democratic decision making and globalization. Answer: d 18. According to Oatley, while many observers question many of the specific details contained in Trump’s approach to trade and the UK’s decision to withdraw completely from the EU, we are seeing a a) growing number of calls to reform and rebalance globalization. b) fewer number of calls to reform and rebalance globalization. c) growing number of calls to isolation and unbalance globalization. d) growing number of calls to reform and reduce globalization. e) fewer number of calls to reform and reduce globalization. Answer: a 19. Suzanne Berger suggests that “open borders must once again be linked to a broad program of social and fiscal reforms. One policy that is not suggested by Oatley is a) raising minimum wages, b) consolidating national health insurance, c) tax reforms, d) addressing opposition to migration, and
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e) tackling the sources of inequality Answer: d 20. According to Oatley, a) Crafting a 21st century version of the Bretton Woods compromise would certainly be a better outcome than the destruction of unilateralism by globalism. b) Crafting a 21st century version of the Bretton Woods compromise would certainly be a better outcome than the destruction of globalization by unilateralism. c) Crafting a 21st century version of unilateralism would certainly be a better outcome than the compromise of Bretton Woods and globalism. d) Crafting a 21st century version of globalism would certainly be a better outcome than the destruction of unilateralism by the compromise of Bretton Woods. e) Crafting a 21st century version of the Bretton Woods compromise would certainly be a better outcome than the destruction of regional coalitions by unilateralism. Answer: b 21. Currently, Putin seems content to disrupt US-EU cooperation, exploit Russia’s energy power, and reassert Russian influence over the former Soviet empire. a) ignore US-EU cooperation. b) exploit China’s energy power. c) reassert Russian influence over the former Soviet empire. d) oppose authoritarian efforts in Eastern European countries. e) oppose democratic efforts in Eastern European countries. Answer: e
22. The idea of weaponized interdependence rests on the recognition that the global economic relationships comprise a) an asymmetric network structure. b) a symmetric network structure. c) global value chains that produce less connection between countries. d) some countries are less connected financially than others. e) some countries are less centrally connected in trade terms than others.
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Answer: a
23. The ability of states to weaponize a central network position to acquire important and strategically useful information from data that flows through the infrastructure of modern IT of data is known as a) the checkpoint effect. b) the panopticon effect. c) the chokepoint effect. d) the asymmetric network effect. e) the central network effect. Answer: b; Chap 16: Page: 12; Understanding
24. A cooperative created and run by and for private financial institutions to transfer payment instructions between institutional counterparties to financial transactions. a) is known as SUDDEN. b) is known as FACTS. c) is known as SWIFT. d) is known as FAST. e) is known as SEATO. Answer: c
25. According to Oatley, contemporary conflict over the global political economy seems to be primarily about a) questioning democracy and markets. b) specific pieces of legislation. c) pandemic management. d) decarbonization. e) supply chain vulnerabilities.
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Answer: a
True-False Questions 1. The challengers of globalization believe that all global economic activity has a negative impact on the environment. Answer: False 2. Total world income has risen much more rapidly during the last 40 years than it did during the nineteenth and first half of the twentieth century. Answer: True 3. Global income inequality is much greater than domestic income inequality in even the most unequal countries. Answer: True 4. According to Oatley, rising inequality reflects that fact that some people have not realized gains from globalization that are orders of magnitude greater than the average improvement. Answer: False 5. Rodrik’s “Political Trilemma” suggests that governments face three desirable objectives. Yet, at any given time, they can realize only two of these three goals. Answer: True 6. One-quarter of the world’s known lithium deposits lie in Brazil and are already the focus of competition between Russian, Chinese, and American firms. Answer: False 7. The chokepoint effect concerns the ability to weaponize a central network position to prevent a third party from accessing a critical system for which there is no effective alternative. Answer: True; 8. According to Oatley, Putin doesn’t desire to alter Russia’s relationship with and position in the contemporary global order. Answer: False
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9. The logics of weaponized interdependence and fear of exclusion and system closure may highlight a single path for great power competition. Answer: True 10. According to Oatley, there has been a lot of systematic effort to think about how decarbonization might impact the global political economy. Answer: False
Essay/Discussion Questions 1. Explain and discuss some of the claims and counter claims about the contemporary effects of globalization in the world economy. 2. Discuss the arguments and evidence Oatley presents to refute the claim that globalization has brought rising inequality and poverty. 3. Explain the definition and implications of the Stolper-Samuelson Theorem. 4. Discuss the arguments and evidence that technological change has been an important cause of rising inequality. 5. Discuss and explain the notion of “skill biased technological change”, 6. Explain the emergence and implications of the dual economy. 7. Discuss how the social impact of trade and investment induced economic restructurings has been amplified by other economic shocks. 8. Explain how China’s emergence as a leading economic power has coincided with a more nationalist and assertive Chinese leadership under Xi Jinping. How has this transformed the nature of US-China relations from the cautious partnership that had prevailed from the 1990s to a dynamic of strategic competition? 9. Explain what is meant by the idea of weaponized interdependence. Analyze this in terms of panopticon and chokepoint effects. 10. Discuss why Russia invaded Ukraine in February 2022. Analyze how this maybe
this may be transitioning toward a post-Globalization era. How would a defeat by Putin change this era?